A Double Standard? Part III

A government official sets up a foundation to aid local organizations. It is funded by business entities that often turn to the government official for help - and usually succeed in getting such help.

Over a six week period, a company sends at least $45,000 in donations to four charitable programs founded by government officials - just as the companies were seeking approval of favorable legislation.

Another company supports a fundraiser for the scholarship fund of a government official.

Another company sponsors a sport competition to help the favorite food bank of a government official.

Another company subsidizes a spa outing in a popular tourist destination to aid the charity of a government official.

Another company helps sponsor a golf tournament benefiting the foundation of a government official.

Another company acknowledges that it participates in government officials' charitable events to get access to the officials to push the company's agenda.

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"Google" Foreign Corrupt Practices Act and charitable giving and you will have enough reading material to keep you busy the rest of the day.

This material will likely reference the 2004 FCPA enforcement action against Schering-Plough (see here).

In that action, the SEC alleged (here) that Schering-Plough violated the FCPA when its wholly-owned Polish subsidiary (“S-P Poland”) improperly recorded a bona fide charitable donation to a Polish foundation where the founder/president of the foundation was also the director of a government health fund (the “Director”) that provided money to hospitals throughout Poland for the purchase of pharmaceutical products.

Although the SEC and Schering-Plough ultimately resolved the matter based only on violations of the FCPA’s books and records and internal control provisions, the enforcement action is commonly viewed as broadening the “anything of value” element of an FCPA anti-bribery violation. (See here).

The SEC’s tacit interpretation of the “anything of value” element in the Schering-Plough matter is significant because there was no allegation or indication that any tangible monetary benefit accrued to the Director, an individual deemed by the SEC to be a “foreign official” under the FCPA.

Rather, the SEC brought the enforcement action on the basis of its apparent conclusion that S-P Poland’s bona fide charitable donations constituted a “thing of value” to the “foreign official” because the donations were subjectively valued by the official and provided him with an intangible benefit of enhanced self-worth or
prestige.

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So will the above donations to government official charities result in FCPA scrutiny?

Nope!

Why not?

Because the government officials are U.S. government officials. See here for the recent New York Times story.

The U.S. has a domestic bribery statute (18 USC 201) (see here) which has similar elements to the FCPA. Yet, I would not hold your breath waiting for domestic bribery prosecutions.

This all begs the question - is there a double standard?

Will a U.S. company's interaction with a "foreign official" (however that term is interpreted) be subject to more scrutiny and different standards than its interaction with a U.S. official?

Do we reflexively label a "foreign official" who receives "things of value" from private business interests as corrupt, yet when a U.S. official similarly receives "things of value" from private business interests we merely say "well, no one said our system is perfect"?

For more on the FCPA's double standard (see here and here).

Thinking About The FCPA's Facilitating Payment Exception?

The Foreign Corrupt Practices Act specifically states that its anti-bribery provisions "shall not apply to any facilitating or expediting payment to a foreign official [...] the purpose of which is to expedite or to secure the performance of a routine governmental action by a foreign official ...".

The term "routine governmental action" means an action "which is ordinarily and commonly performed by a foreign official in," among other things, "obtaining permits, licenses, or other official documents to qualify a person to do business in a foreign country."

The 1988 Conference Report (here), which ironed out the differences between House and Senate bills creating the exception, states:

"The Conferees wish to make clear that 'ordinarily and commonly performed' actions with respect to permits or licenses would not include those governmental approvals involving an exercise of discretion by a government official where the actions are the functional equivalent of obtaining or retaining business for or with, or directing business to, any person."

This is what the FCPA says and the DOJ acknowledges, at least on paper (see here), that "there is an exception to the anti-bribery prohibition for payments to facilitate or expedite performance of a 'routine governmental action.'"

However, corporations tend to be risk averse.

Thus, against the backdrop of enforcement agencies seemingly incapable of recognizing that the FCPA does indeed contain a "facilitating payment" exception, a risk averse corporation may just say the heck with it, why risk making a payment exempted from the FCPA's anti-bribery provisions if enforcement agencies are likely to nevertheless conclude that the payment violates the FCPA.

It is against this backdrop that the recent SEC filing (see here) of Transocean, the world's largest offshore drilling contractor, caught my eye.

It states, in relevant part, as follows:

"We are currently involved in several investigations by the DOJ and the SEC involving our operations and whether or not we or any of our
employees have violated the FCPA."

"Our current investigations include a review of amounts paid to and by customs brokers in connection with the obtaining of permits for the temporary importation of vessels and the clearance of goods and materials. These permits and clearances are necessary in order for us to operate our vessels in certain jurisdictions. There is a risk that we may not be able to obtain import permits or renew temporary importation permits in West African countries, including Nigeria, in a manner that complies with the FCPA. As a result, we may not have the means to renew temporary importation permits for rigs located in the relevant jurisdictions as they expire or to send goods and equipment into those jurisdictions, in which event we may be forced to terminate the pending drilling contracts and relocate the rigs or leave the rigs in these countries and risk permanent importation issues, either of which could have an adverse effect on our financial results. In addition, termination of drilling contracts could result in damage claims by customers."

Based on the above disclosure, it is difficult to analyze whether Transocean is legitimately entitled to the permits and clearances it is seeking.

Let's assume this is the case, but that a low-level government bureaucrat with a hand out is demanding a payment to do what he otherwise has a legal obligation to do - and that is grant licenses and permits pursuant to the applicable governing rules and regulations.

If this is the case, it is unfortunate that a company feels no other option than to breach contracts and materially restructure its operations because the enforcement agencies are seemingly incapable of recognizing that Congress specifically authorized companies subject to the FCPA to make facilitating payments such as those that perhaps Transocean would have to make in order to secure the permits and clearances at issue.

While some find facilitating payments to be a corrupt payment under a different name (see here) and while the soon-to-be implemented U.K. Bribery Act contains no such exemption, the fact remains that the FCPA contains an express exception for facilitating payments and it is this statute that the enforcement agencies are obligated to enforce.

FBI Awards BAE $40 Million Contract

Yesterday's post (here) discussed the shortcomings of HR 5366 (the Overseas Contractor Reform Act). As highlighted in that post, HR 5366 represents impotent legislation because it exhibits little understanding of how conduct violating the FCPA is typically resolved.

One matter discussed in the post was the February 2010 enforcement action against BAE in which the DOJ alleged, among other things, that the company “provided substantial benefits,” including through U.S. payment mechanisms, to a Saudi public official “who was in a position of influence regarding” a lucrative fighter jet contract. (See here). The bribery was so extensive per the DOJ's allegations, that just one BAE employee submitted $5 million in invoices for benefits to the official during a one year period.

Yet, these bribery, but no bribery allegations (see here) did not result in any FCPA anti-bribery charges against BAE - the largest defense contractor in Europe and the fifth largest in the U.S. as measured by sales.

Thus, even if HR 5366 was enacted prior to February 2010, it would not have prevented BAE from securing federal government contracts because the DOJ did not charge BAE with any FCPA anti-bribery offenses.

How many federal government contracts has BAE secured since the DOJ alleged that the company “provided substantial benefits” to a Saudi public official “who was in a position of influence regarding” a lucrative fighter jet contract?

Judging just by BAE's press releases (see here) many - so many that separate links would be distracting.

None stand out more than the $40 million contract BAE was recently awarded by the FBI "to provide critical information security safeguards, including certification and accreditation, to ensure the confidentiality and privacy of FBI computer networks in the United States and around the world." (see here).

BAE's conduct giving rise to the February 2010 enforcement action, in which BAE agreed to pay a $400 million criminal fine, "was investigated by FBI special agents who are part of the Washington Field Office’s dedicated FCPA squad." (See here).

In connection with the BAE resolution, the FBI issued its own press release (see here).

In the release, Shawn Henry, Assistant Director in Charge of the FBI’s Washington Field Office stated: “competition is one of the foundations of our economic system,” and “corporations and individuals who conspire to defeat this basic economic principle not only cause harm but ultimately shake the public’s confidence in the entire system.”

I agree.

The public's confidence in the entire system is shaken, but not for the reason Henry articulated.

House Passes Impotent Debarment Bill

The façade of Foreign Corrupt Practices Act (FCPA) enforcement is so deep that the House of Representatives recently passed legislation that will fail to accomplish its stated purpose – to debar corporations committing FCPA violations from federal government contracts.

On September 15th, the House, by a unanimous 409-0 vote, passed H.R. 5366 (“Overseas Contractor Reform Act”) (see here). The Act generally provides that a corporation “found to be in violation of the [FCPA’s anti-bribery provisions] shall be proposed for debarment from any contract or grant awarded by the Federal Government within 30 days after a final judgment of such a violation.”

The Act’s key trigger term for debarment – “found to be in violation” of the FCPA’s anti-bribery provisions – is a trigger that is not reached in nearly every FCPA enforcement action because of the façade of FCPA enforcement. Thus, the Act represents impotent legislation.

Nearly every FCPA enforcement action against a corporation is resolved through a non-prosecution agreement (“NPA”) or a deferred prosecution agreement (“DPA”). In an NPA, such as the recent NPAs against UTStarcom, Inc. (here) and Helmerich & Payne, Inc. (here), criminal charges are not filed in court. Rather, the “charges” are resolved via a private letter agreement that is subject to no judicial scrutiny. In a DPA, such as the recent DPAs against Technip S.A. (here) and Snamprogretti Netherlands BV (here), criminal charges are technically filed in court, but those charges are never prosecuted if the company adheres to compliance undertakings set forth in the DPA. Because of the prevalence of NPAs or DPAs in the FCPA context, a corporation entering into such an agreement with the Department of Justice (“DOJ”) is never “found to be in violation” of the FCPA’s anti-bribery provisions.

The Act will be even more impotent given the frequency by which the DOJ resolves clear instances of corporate bribery without charging FCPA anti-bribery violations. Three recent examples highlight this troubling feature of the façade of FCPA enforcement. In March 2010, the DOJ alleged that Daimler AG (“Daimler”) “engaged in a long-standing practice of paying bribes” to foreign officials in at least 22 countries. Despite these allegations, the DOJ resolved the matter against Daimler without charging FCPA anti-bribery violations (see here). In February 2010, the DOJ alleged that BAE Systems Plc (“BAE”) “provided substantial benefits,” including through U.S. payment mechanisms, to a Saudi public official “who was in a position of influence regarding” a lucrative fighter jet contract. Despite these allegations, the DOJ resolved the matter against BAE without charging FCPA anti-bribery violations (see here). In December 2008, the DOJ alleged that Siemens AG engaged in pattern of bribery “unprecedented in scale and geographic reach” and that the “corruption involved more than $1.4 billion in bribes to government officials in Asia, Africa, Europe, the Middle East and the Americas.” Despite these allegations, the DOJ resolved the matter against Siemens without charging FCPA anti-bribery violations (see here).

Numerous other examples could also be cited and because of how FCPA violations are typically resolved by the DOJ, the Act’s debarment provisions will only be triggered in the rarest of instances.

Yet this salient fact was presumably not understood by Representatives who unanimously voted for the Act and championed it as common sense, effective legislation. Who can blame the Representatives for not understanding the full effects of the façade of FCPA enforcement? Most Representatives probably assumed that the DOJ prosecutes companies that commit FCPA anti-bribery violations with FCPA anti-bribery charges in a transparent manner subject to judicial oversight and scrutiny. Yet in this current façade of FCPA enforcement era nothing can be taken for granted.

Perhaps those who championed the Act were aware of its impotence yet voted for it because the costs of voting against it were too great a few months before an election. Representative Peter Welch (D-VT) sponsored the Act in response to an occurrence that is merely tangential to the FCPA - the conduct of Xe Services (formerly known as Blackwater Worldwide) following the 2007 shooting in Nissour Square Iraq that left 17 dead. (See here, here and here). It is clear from the floor statements of various Representatives (see here) that Blackwater’s conduct, and a desire to rein in military contractors, motivated passage of the Act.

Whatever the motivations for unanimous House passage of the Act, because of the façade of FCPA enforcement, the Act is impotent in addressing the conduct it seeks to address. The Act now moves to the Senate Committee on Homeland Security and Governmental Affairs. If the Senate is serious about imposing a debarment penalty on those who commit FCPA anti-bribery violations, a penalty deserving of serious consideration to best effectuate deterrence, the Senate first needs to understand the façade of FCPA enforcement and draft a bill that can actually accomplish its stated purpose.

Friday Roundup

In one way, shape or form, whistleblowing is the theme of this week's Friday Roundup.

SEC Timeline on Various Dodd-Frank Provisions

The SEC has a lot on its plate in implementing various rules pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank").

Included on that list is the new whistleblower provisions established by Dodd-Frank (see here for a prior post).

Interested in following the SEC's progress?

If so, here are the important dates (or months as the case may be) to keep in mind.

October - December 2010

SEC plans to "propose rules to implement a Whistleblower Incentives & Protection Program," "report to Congress on Whistleblower Program," and "Establish Whistleblower Office."

January - March 2011

SEC plans to "adopt rules to implement a Whistleblower Incentives & Protection Program."

Another Dodd-Frank provision many in the FCPA universe are following is Section 1504 - "Disclosure of Payments by Resource Extraction Issuers" (see here for a prior post).

Here is the planned timeline for that provision.

October - December 2010

SEC to "propose rules regarding disclosure by resource extraction issuers"

January - March 2011

SEC to "adopt rules regarding disclosure by resource extraction issuers"

Khuzami on the SEC's Whistleblower Program

Earlier this week Robert Khuzami (Director, Division of Enforcement - SEC) had this to say about the SEC's whistleblower program in testimony before the Senate:

"The Division currently is in the process of drafting the proposed rules applicable to the Whistleblower Program, including rules setting forth the procedures for whistleblowers to submit original information to the Commission and for the Commission to make awards to whistleblowers. We also have begun the process of staffing the Commission’s Whistleblower Office. As we create the Program and the Office, we will be mindful of competing interests, including: (i) a desire to encourage whistleblowers to provide the Commission with high-quality tips regarding potential violations of the federal securities laws, and (ii) a need to avoid creating undue burdens on the Commission and the constituencies that we protect and regulate that could result from groundless whistleblower submissions."

Furmanite Corporation

Kendall Law Group is one of the new breed of FCPA "plaintiff" firms that have sprung up in recent months. The sequence is usually predictable. A company discloses an FCPA issue or inquiry. Within days the firm, or one of the other firms that is also seeking to capitalize on what, at times, seems like an FCPA feeding frenzy, issues a press release such as this one. These releases have become so common, that it is easy to gloss over them.

However, Kendall Law Group's September 16th release (here) regarding Furmanite Corporation was a bit different. Here is what it said, in relevant part:

"The Kendall Law Group was recently notified by a confidential source of potential violations of the Foreign Corrupt Practices Act (FCPA) by Furmanite. The company was allegedly made aware of potential violations of the FCPA as early as 2008. The firm’s source indicates that cash gifts were given to representatives of state-owned enterprises to maintain and develop customer relations. Furmanite has two subsidiaries in China, Furmanite Mechanical Technology Services Co. Ltd. which operates out of Shanghai and Furmanite East Asia Ltd. which is based in Hong Kong. Furmanite has entered into business relationships with state-owned enterprises in China, such as the recently announced delivery of equipment to China HuanQiu Contracting and Engineering Company, a branch of the China National Petroleum Corporation, China’s largest integrated oil and gas company."

Is Kendall Law Group representing a whistleblower in connection with Dodd-Frank's new whistleblower provisions? Pursuant to the new whistleblower provisions, a whistleblower may be represented by counsel.

Furmanite, "the worldwide innovator and leader in comprehensive on-site and on-line plant and pipeline maintenance" according to its website (here), is an issuer on the New York Stock Exchange.

To my knowledge Furmanite has not issued a release / disclosure about this issue.

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A good weekend to all.

A Noisy Exit

Robert Bruce, a former Director and Chair of the Audit Committee of China North East Petroleum, is not the only individual to have recently made a noisy exit (see here for the prior post at the FCPA Blog).

Peter Barker-Homek was the Chief Executive Officer of Abu Dhabi National Energy Company PJSC - also known as TAQA (see here) and TAQA New World Inc. (see here).

In an explosive complaint (see here) recently filed in U.S. District Court for the Eastern District of Michigan (Southern Division), Barker (a former pilot in the U.S. Marine Corps and Gulf War veteran as well as State Department official) alleges as follows:

"When Barker tried to put a stop to the kickbacks, bribery, accounting fraud and corruption at TAQA, the Defendants [TAQA, TAQA New World, [...] (a NY licensed attorney and chief attorney for and General Counsel of TAQA] fired him. Instead of abiding by the terms of Barker's employment contract, they summoned him to a meeting and presented him with a so-called 'severance agreement,' a one-sided agreement in which Barker purportedly agreed to step down as CEO and forfeit millions of dollars owed to him. Defendant [...], a New York-licensed attorney, chief attorney for and General Counsel of TAQA, demanded that he sign the 'severance agreement' on the spot, comply with its provisions, or be arrested and sent to prison. Worried for his life and the well-being of his family, Barker signed the 'severance agreement.' Thereafter, he was harassed and lived in fear of a 'knock' on the door by police, received mysterious phone calls and was followed, until finally he and his family escaped to the safety of the United States."

According to the complaint, 75% of TAQA's stock is owned by the Abu Dhabi Ruling Family and 25% is owned by investors and is publicly-traded on the Abu Dhabi Stock Exchange. The complaint asserts that TAQA has offices in North America, including in Ann Arbor, Michigan, and that TAQA does business by and through various subsidiaries including TAQA New World Inc., a Delaware corporation based in Ann Arbor.

In terms of the Foreign Corrupt Practices Act, TAQA New World is a "domestic concern." The complaint also asserts that TAQA "conducts several of its global business functions out of its Ann Arbor office including: human resources; accounting; tax management; and regulatory affairs."

While Barker's complaint does not appear to directly implicate the FCPA, given his general allegations, this case may draw DOJ interest.

Will Bistrong's Plea Impact The Africa Sting Cases?

Last week Richard Bistrong's plea agreement was made public.

Who is Richard Bistrong?

He is "Individual 1" - the person who worked with FBI agents as alleged in the Africa Sting indictments. (See here). (See here for the superseding indictment).

Bistrong was soon identified as Individual 1 and criminally charged.

Not in connection with the Africa Sting case, but a completely different matter. (See here). The criminal information (here) charges Bistrong with conspiracy to violate the Foreign Corrupt Practices Act's antibribery provisions, books and records provisions, and the International Emergency Economic Powers Act and related Export Administration Regulations.

The conspiracy was broad in scope and included charges that Bistrong conspired with others: (i) to obtain for his employer [Armor Holdings, a former publicly-traded company, currently a subsidiary of BAE Systems] 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" per the FCPA) to cause the officer to award the contracts; (ii) to obtain for his employer, a $2.4 million pepper spray contract with the National Police Services Agency of the Netherlands by paying a Dutch agent approximately $15,000 while knowing that the agent would pass along some of that money to a procurement officer with the Police Services Agency to influence the contract; and (iii) to obtain for his employer (although it was never obtained), a contract to sell fingerprint ink pads to the Independent National Elections Commission of Nigeria by making kickback payments to a commission official indirectly through an intermediary company.

Bistrong's criminal information was filed on January 21, 2010.

It turns out that Bistrong agreed to plead guilty nearly a year before that - in February 2009, as indicated in the Bistrong plea agreement (see here).

So what did Bistrong agree to when he signed the plea agreement in February 2009?

To cooperate fully with with the government, including:

"whenever requested by the Government, working in an undercover role to record meetings and telephone calls under the supervision of United States law enforcement;" and

"attending all meetings at which the Government requests his presence."

Per the Bistrong plea agreement, Bistrong "and the Department of Justice agree that the [Sentencing Guidelines] sentence is five years' imprisonment." Even so, the plea agreement states: "if in the sole and unreviewable judgment of the Government the defendant's cooperation is of such quality and significance to the investigation or prosecution of other criminal matters as to warrant the Court's downward departure from the sentence calculated by the Sentencing Guidelines, the Government may at or before sentencing make a motion pursuant to Section 5K1.1 of the Sentencing Guidelines reflecting that the defendant has provided substantial assistance and recommending a downward departure from the applicable guideline range."

Brady Toensing (diGenova & Toensing, LLP) (see here) represents Bistrong.

What impact will Bistrong's plea have in the Africa Sting case - particularly the defendants' expected entrapment defense?

Per the superseding indictment, the earliest conduct forming the basis of the criminal charges against the Africa Sting defendants occurred in May 2009. In other words, Bistrong had already agreed to plead guilty to separate criminal charges prior to introducing the Africa Sting defendants to the undercover "foreign official" or the "foreign official's" undercover representative.

Will this matter?

Unlikely says Dru Stevenson, a Professor of Law at South Texas College of Law (see here). Professor Stevenson previously offered his thoughts on the entrapment issue (here) and offered these thoughts in light of Bistrong's plea.

"The incentives of the informant or undercover agent have never mattered in an entrapment defense, under either of the tests that courts use. For the subjective test (used in federal court), entrapment analysis focuses entirely on the defendant's predisposition to commit the crime. The incentives of the agent provocateur are irrelevant. For the objective test (used in a minority of states, but never in the federal courts), entrapment analysis focuses on the actual conduct of the undercover agents - how outrageous it was - but not on the agent's incentives or motives. It would be a completely novel approach if a court gives any weight to the fact that the agent provocateur had made a plea bargain. And it is not clear why this should matter any more than an undercover police officer who is paid to trick criminals into committing crimes as part of a sting operation."

The 30% Commission, The Dream Seeker, The Ferrari Spyder, and Consulting Fees for Mom

According to its website (see here) Mexico's Comision Federal de Electricidad ("CFE") "is a decentralized government agency, duly incorporated and which controls its own assets."

Does that make CFE's Sub-Director of Generation and Director of Operations "foreign officials" under the FCPA?

According to the DOJ, apparently so, as it alleges in this recent indictment against Enrique Faustino Aguilar Noriega and Angela Maria Gomez Aguilar. See here for the DOJ release.

According to the indictment, "Comision Federal de Electricidad ('CFE') was an electric utility company owned by Mexico. During the time period relevant to this Indictment, CFE was responsibile for supplying electricity to all of Mexico othern than Mexico City. CFE contracted with Mexican and foreign companies for goods and services to help supply electricity services to its customers."

"Company LM" according to the indictment, (a company identified as Lindsey Manufacturing in media reports - see here see here for more about Lindsey Manufacturing), is a "privately held company incorporated in California and headquartered in Azusa, California. According to the indictment, LM "manufactured emergency restoration systems and other equipment used by electrical utility companies" including "state-owned utilities, including CFE" "one of LM's most significant customers." According to the indictment, LM "conducted business in a number of foreign markets through sales representatives."

According to the indictment, "Grupo Internacional De Asesores S.A. ('Grupo') was a company incorporated in Panama and headquartered in Mexico" with a "brokerage account in Houston, Texas at Global Financial Services, Inc." The indictment alleges that "Grupo's purported business was to provide sales representation services for companies like LM that had business with CFE" and that "Grupo was LM's sales representative in Mexico and received a percentage of the revenue LM received from its contracts with CFE." According to the indictment, Grupo was an "agent of a domestic concern" under the FCPA.

According to the indictment, Enrique Aguilar, a lawful permanent resident of the U.S. "was a Director of Grupo and was hired by LM to obtain contracts from CFE" and a "an agent of a domestic concern" under the FCPA.

According to the indictment, Angela Aguilar, a citizen of Mexico, "served as an Officer and a Director of Grupo" and "managed Grupo's finances" and was "the sole signatory on Grupo's Global Financial brokerage account."

According to the indcitment, Enrique Aguilar, together with President KL (an individual identified as the President of LM), Vice President SL (an individual identified as the Vice President and Chief Financial Officer of LM), LM and others conspired to make improper payments to "foreign officials" to assist Aguilar, Grupo, President KL, Vice President SL, LM, and others in obtaining and retaining business in violation of the FCPA.

The indictment alleges that Aquilar offered to become LM's "sales representative in Mexico in exchange for a thirty percent commission on all of the goods and services" LM sold to CFE and that President KL and Vice President SL "would agree to pay" Aquilar "a thirty percent commission into Grupo's brokerage account at Global Financial, even though it was significantly higher than the commission LM paid to its previous sales representative in Mexico" knowing that Aquilar "had a close personal relationship with Official 1 and would use all or a portion of the thirty percent commission to pay Official 1 and others bribes in exchange for CFE awarding LM contracts."

Among other things, the indictment alleges that: (i) Grupo's Global Financial brokerage account was used to "pay the credit card bills for Official 1's American Express credit card 'in full every month, until further notice'"; (ii) Aquilar "aided Official 1 in purchasing an 82 foot yacht named the Dream Seeker for $1,800,010 ...;" (iii) Aquilar caused wire transfers to Official 2's female and male relatives for "payment for professional services advice" and Official 2's mother and brother for a "consulting fee;" and (iv) Aquilar caused the "issuance of a check to Ferrari of Beverly Hills from Grupo's Financial brokerage account for approximately $297,500 to purchase a 2005 Ferrari Spyder for Official 1."

Who are Official 1 and 2?

According to the indictment:

"Official 1 was a Mexican citizen who held a senior level position at CFE. Official 1 became the Sub-Director of Generation for CFE in 2002 and the Director of Operations in 2007. Official 1's position at CFE made him a 'foreign official' as that term is defined in the FCPA ..."

"Official 2 was a Mexican citizen who also held a senior level position at CFE. Official 2 was the Director of Operations at CFE until that position was taken over by Official 1 in 2007. Official 2's position at CFE made him a 'foreign official' as that term is defined in the FCPA ..."

[For more on Official 1 and CFE - see David Luhnow, "U.S. Probe Leads to Mexico Chief," Wall Street Journal (August 24, 2010)]

According to the indictment, Angela Aguilar assisted or otherwise caused many of the above referenced payments to be made.

Based on the above core conduct, Enrique Aquilar was charged in a seven-count indictment with conspiracy to violate the FCPA, FCPA violations, money laundering conspiracy and money laundering. Angela Aquilar was charged with money laundering conspiracy and money laundering.

As noted in the DOJ's release "an indictment is merely an accusation, and defendants are presumed innocent until and unless proven guilty beyond a reasonable doubt."

Michael Zweiback (here), a former DOJ prosecutor currently with Seyfarth Shaw LLP, represents both Enrique and Angela Aquilar. He stated: "we intend to vigorously defend the charges and expect the Aguiliar's to be found not guilty."

With Lindsey Manufacturing and certain of its top executives implicated in the alleged conduct, it is likely that the above core allegations will be repeated in future enforcement actions.

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The Aquilar indictments continue a DOJ trend of holding agents, sales representatives etc. accountable for allegedly participating in bribery schemes. (See this prior post for other such enforcement actions).

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Does CFE ring a bell?

It should because this alleged "state-owned utility company" is at the center of the enforcement actions against John Jospeh O'Shea (see here and here) and Fernando Maya Basurto (see here).

Judge (Again) Significantly Rejects DOJ's Recommendations In Sentencing Nexus Defendants

As noted in this DOJ release, last week several defendants in the Nexus Technologies enforcement action (see here for prior posts) were sentenced. Because many media sources merely regurgitate DOJ releases in such instances, this post may be the first you'll learn that the sentencing judge in the Nexus matter significantly rejected the DOJ's sentencing recommendations.

For instance, and as described more fully below, the DOJ sought a 14-17 year sentence for lead defendant Nam Nguyen, but the judge sentenced him to 16 months (plus 2 years of supervised release).

Further, the DOJ sought multi-year sentences for two defendants, but the judge sentenced them to probation.

The DOJ's sentencing memoranda (see here for the 79 pages of collective material) provide an interesting read and clearly demonstrate the growing divide between how the DOJ views FCPA defendants and how judges view such defendants at sentencing. For instance, Judge Shira Scheindin stated at Frederic Bourke's sentencing (see here) “after years of supervising this case, it’s still not entirely clear to me whether Mr. Bourke is a victim or a crook or a little bit of both.”

The DOJ stated in Nam Nguyen's sentencing memo that its recommendation (168-210 months) should be accepted "to promote general deterrence" and that conduct such as Nguyen's "will hardly be deterred by sending the message that the consequences of such conduct is at worst several months of imprisonment."

Yet, the judge still sentenced Nam Nguyen to 16 months (plus 2 years of supervised release).

Also of note is that the DOJ criticized Nam Nguyen for "subjectively" looking at the "history of FCPA sentencing, focusing on the statistical outlier of the case U.S. v. Green ... but ignoring the more common cases of significant prison time" such as "Charles Jumet, who paid less than 1/3 of what Nguyen paid in bribes, but received 87 months' imprisonment."

Let me assert that it is the DOJ who is "subjectively" looking at the "history of FCPA sentencing" and that Jumet is the "statistical outlier" - not sentences such as of the Greens.

Indeed, it is very common for FCPA defendants to be sentenced to prison terms measured in days and months, not years.

Consider the following recent sentences:

Greens - 6 months (August 2010)

Frederic Bourke - 366 days (November 2009)

Jim Bob Brown - 366 days (January 2010)

Jason Edward Steph - 15 months (January 2010)

The below post provides an overview of the Nexus sentences as well as the DOJ's sentencing memos.

Nam Nguyen

Sentence: 16 months, 2 years of supervised release

DOJ Recommendation: 168-210 months

In its sentencing memorandum, the DOJ stated that Nguyen "paid bribes to multiple Vietnamese government officials in exchange for contracts for his business" and that "Nguyen literally offered a bribe on every single contract bid over a period of more than nine years ...".

DOJ sought a four-level sentencing enhancement "because the offense involved a public official in a high-level decision-making or sensitive position." Specifically, the DOJ asserted that Nguyen paid bribes to "Nguyen Van Tan, who was the Managing Director of T&T Co. Ltd. ... the procurement arm of Vietnam's Ministry of Public Safety."

Other items of interest from the DOJ's sentencing memorandum.

In a footnote, the DOJ asserts that "the court has ruled in favor of the government" on the "foreign official" issue briefed in the case. However, as noted in this prior post, the DOJ specifically argued throughout its brief that a court decision as to this issue was premature. What actually happened is that the judge denied the defendants' motion to dismiss without comment or analysis. The DOJ stated in the same footnote that because Nguyen's counsel discussed the "foreign official" issue in his sentencing memorandum, that this "raises serious questions as to whether or not he has actually accepted responsibility for his crimes."

The DOJ memo contains "Exhibit A" - a chart detailing the "Sentences of Natural Persons Who Pleaded Guilty to FCPA Violations Since 2001."

The chart is misleading.

Nowhere in the chart does it indicate, nor in the brief referencing the chart is it noted, that the sentences are not just for FCPA violations, but, in many cases, sentences based on other violations of law as well.

For instance, in the longest sentence on the DOJ's chart - Charles Jumet (87 months) nowhere is it noted that the "FCPA" portion of the sentence was actually lower. Jumet pleaded guilty to two counts - conspiracy to violate the FCPA and making false statements to federal agents. The false statements portion of his sentence was 20 months. Thus, Jumet's "FCPA" sentence was 60 months - not 87 months as suggested by the DOJ's chart.

An Nguyen

Sentence: 9 months, 3 years of supervised release (notwithstanding that, per the DOJ's sentencing memorandum, Nguyen was on probation at the time of his offense)

DOJ Recommendation: 87-108 months

In its sentencing memorandum the DOJ stated that Nguyen "paid bribes to multiple Vietnamese government officials in exchange for contracts for his family's business." Elsewhere in the memo, the DOJ states that "Nguyen's bribery was particularly egregious." In connection with its decision not to seek a sentencing enhancement for an offense involving a public official in a high-level decision-making or sensitive position, the DOJ noted that "Nguyen was unaware of the nature, position, or role of the specific officials who received the bribe payments."

Kim Nguyen

Sentence: 2 years probation

DOJ Recommendation: 70-87 months (even after the DOJ's downward departure recommendation)

The DOJ requested a Section 5K1.1 downward departure. The DOJ noted that "even though Kim Nguyen did not begin providing information to the government until shortly before trial" this information nevertheless "appeared to play a role in her siblings' decisions to plead guilty." The DOJ noted that "Nguyen met with the government on approximately two occasions to explain the business practices and financial records of Nexus Technologies" and "explained various entries in the Nexus books which allowed the government accurately to calculate the total amount of bribes paid by the defendants ..."

In its sentencing memo, the DOJ stated that "Nguyen played a critical role in this conspiracy, as she was the person responsible for handling the finances and maintaining the books and records of Nexus." The DOJ stated that Nguyen "funneled the bribe payments to an off-shore company controlled by Nexus, which then forwarded the bribe payments to the Vietnamese officers, and it was Kim Nguyen who falsified the associated wire-transfer documents to cover their tracks." The DOJ further asserted that e-mail correspondence "makes it very clear that Kim Nguyen knew exactly what she was doing, and why." As with An Nguyen, the DOJ did not seek a sentencing enhancement for Kim Nguyen and noted that "Kim Nguyen was unaware of the nature, position, or role of the specific officials who received the bribe payments."

Joseph Lukas

Sentence: 2 years probation

DOJ Recommendation: 37-46 months (even after the DOJ's downward departure recommendation)

The DOJ requested a Section 5K1.1 downward departure. The DOJ noted that Lukas "met with the government on approximately seven separate occasions over the course of approximately 1.5 years and explained everything he knew about his co-defendants, their criminal conduct, their personal histories, and their business records." According to the DOJ, "Lukas also created spreadsheets of information for the government, voluntarily turned over his computer for government analysis, and spent hours upon hours poring through documents in order to explain the business practices of Nexus Technologies and the Nguyen siblings."

In its sentencing memorandum, the DOJ stated that "Lukas helped Nexus Technologies pay bribes to multiple Vietnamese government officials in exchange for contracts." According to the DOJ, "Lukas was responsible for vendor relations and negotiations in the United States (which included identifying vendors who could supply the requested goods at low enough prices to allow the bribe payments.)".

*****

As to the Greens' sentence, the DOJ noted in footnote 8 of Nam Nguyen's sentencing memo that the "DOJ is considering appealing the sentence in that case."

World Bribery & Corruption Compliance Forum - Comments by U.S. Officials

As promised in yesterday's post (here) that provided a summary of comments by U.K. officials at the World Bribery & Corruption Compliance Forum in London hosted by IBC Legal Conferences, today's post provides a summary of Charles Duross's (Deputy Chief - Fraud Section, DOJ) special address as well as comments made by Duross and Thierry Olivier Desmet (Assistant Regional Director, FCPA Unit, SEC) during a panel discussion about voluntary disclosure.

Duross began by noting that the DOJ’s FCPA unit is still very much in a transition phase. He stated that the unit recently added prosecutors with expertise in gathering foreign evidence as well as new prosecutors with the ability to try substantial criminal cases to verdict. Duross stated that the “ability to try lengthy and complex trials” is critical to the FCPA unit’s success and that the unit must continue to be willing to try cases and be put to its burden. Duross stated that the DOJ’s FCPA unit consists of “world class prosecutors” “pure and simple” and that these prosecutors and other personnel make “tremendous personal sacrifices” in their mission of combating bribery. For instance, he noted that in the past few months DOJ prosecutors have traveled to a dozen different countries on four different continents to gather evidence and investigate cases.

Duross also noted that the DOJ works with “tenacious” agents willing to pursue any lead. These agents include, most notably, FBI agents, as well as agents from Immigration, the Internal Revenue Service, Office of Foreign Assets Control, and the Office of Export Enforcement. He said that these agents will “follow the evidence to where it leads them” and that these agents will use traditional law enforcement tools including surveillance, warrants, and wire taps.

Duross stated: “let me be clear – paying bribes to foreign officials to secure business is illegal and is a crime, you will be investigated like any other criminal, and that it doesn’t matter if you wear a tie or you went to a fancy business school.” He said that “if [the DOJ] wins, and we win often, you will go to prison.” He stated that the DOJ is “normally outnumbered by armies of defense attorneys and accountants,” but that DOJ prosecutors are “never outworked and never outhustled.” Duross stated that the DOJ is “always pursuing justice and that it is always seeking to do the right thing.”

Duross also stated that the DOJ continues to expand its network and further development its relationships with foreign counterparts around the world. He stated that the DOJ has “no stronger ties” than with the U.K. and that to say the DOJ has a “close relationship” with the U.K. and the Serious Fraud Office “would be an understatement” as demonstrated by the recent BAE and Innospec prosecutions.

Duross admitted that he takes his new position with a bit of “trepidation” given that he has big shoes to fill (he made specific praise for Peter Clark and Mark Mendelsohn) and given that each new case is followed more closely than the last. He stated that such “scrutiny and criticism can be constructive” and that if it means the DOJ needs to review past practices “we will do so” and that the only way for DOJ to get better is for it to reevaluate what it is doing.

Duross also noted that the DOJ’s FCPA program will be “graded” later this year under the peer review process sponsored by the OECD. The lead examiners in this process are representatives from Argentina and the United Kingdom. He noted that the examiners spent three days in Washington D.C. over the summer and the examiners were provided over 1,000 pages of documents. He also stated that the examiners spent considerable time with the private sector without DOJ involvement something he termed “unprecedented.” According to Duross, the examiner’s report will be made public in mid-October as well as the U.S. response to OECD’s phase 3 questionnaire.

Duross is confident that the U.S. “has a tremendous story to tell” and that if the peer review process identifies area for potential improvement, then “we will welcome this.” Duross said that “if the bar is raised we welcome that” “if it is consistent with our treaty obligations and if all countries are treated equally.”

Duross explained that the FCPA unit has a “number or pending trials” and a significant number of investigations “in the pipeline.” He mentioned upcoming trials in Miami in connection with the Haiti Teleco enforcement actions (see here for prior postings); the upcoming trial of various executives of Control Components Inc. in California – a trial he expects to last two months (see here for prior postings); the pending trials of the Africa Sting defendants in Washington, D.C. (see here for prior postings); and a pending trial in Houston.

In each of these cases, Duross said that the DOJ FCPA unit partners with local AUSA’s who are experts on local trial procedure and have familiarity with the judge. He said that these partnerships are “critical” to the FCPA unit’s success, even if, per DOJ policy, all FCPA prosecutions must be handled by DOJ Main Justice. Duross noted that recently over 90 prosecutors (both DOJ and SEC) participated in “three intense days” of FCPA training at the SEC’s headquarters (see here for a prior post). In concluding on this issue, Duross stated that it would be an “understatement” to say that the DOJ’s team is growing.

In addition to trials, Duross noted that the DOJ’s “pipeline” of investigations “continues to grow.” He said it would “short sighted” if one was left with the view that the only way DOJ receives leads is through voluntary disclosures. Duross dispelled the notion that voluntary disclosures make up the “majority” of its cases. He said that this was “not true and has never been.” According to Duross, when DOJ last looked into this issue a few years ago, the percentage of voluntary disclosure cases was approximately 1/3. On voluntary disclosure, Duross stated that DOJ “has and will continue to provide meaningful credit for companies that provide voluntary disclosures.” He also stated that several voluntary disclosures result in DOJ declinations and that these declinations, which are not often made public, “should not be underestimated.”

During the public Q&A session, I asked Duross about DOJ declinations in FCPA inquiries. I noted that through the FCPA Opinion Release Procedure, DOJ often makes its no-enforcement action decision known as to contemplated business conduct. I asked whether it is in the public interest for the DOJ to publicly disclose its declination decisions, including the facts disclosed by the company and why DOJ, on those facts, declined prosecution. Duross said that the question presented a “difficult issue” and he shared an example of a company that disclosed conduct to the DOJ, but the DOJ declined to prosecute. According to Duross, DOJ asked the company whether it wanted the declination decision to be made public and the company said no - reasoning that it already had disclosed the issue and that there was no need for another public disclosure.

Duross noted that the DOJ receives allegations from a number of sources: the FBI, pro-active investigations, tips from U.S. embassies around the world, anonymous tips, e-mails, and whistleblowers. As to anonymous tips, e-mails, and whistleblowers, Duross stated that DOJ does not immediately launch a full-blown investigation, rather DOJ does its best to verify the information, weight other information, and to make the best judgment possible before commencing an investigation. In sum, Duross said “I don’t want to leave you with the impression that but for voluntary disclosures we would be sitting around on our hands.”

Duross emphasized that the DOJ and its law enforcement partners “make tons of efforts to pursue matters pro-actively” and that the “likelihood of getting caught is increasing over time” and that the world is getting smaller. For instance, Duross said he receives Google Alerts that contain the word bribe. He also shared a story about a “major Fortune 50 company” being the focus of a bribery-related story in a Chinese newspaper. Duross said that the DOJ saw the story on a Sunday night and that by 9:30 a.m. on Monday morning the DOJ had already sent a letter to the general counsel of the company asking for an explanation. Duross explained, that after learning the facts, the DOJ concluded that the newspaper story was incorrect because the case was merely an employee embezzlement matter and had nothing to do with bribery.

Duross next spoke about “tone at the top” and how important it is because non-executive employees look to the board and senior managers for guidance. Duross said that boards and executives should not “let their employees down” and should make clear that unethical and illegal behavior will not be tolerated and that company leaders “should mean it.” On this issue, Duross said that frequently a company voluntarily disclosing will, at the first meeting with DOJ, “slap down on the table its compliance policy.” Duross will then ask the company representative whether anyone has ever been reprimanded for conduct in violation of the policy and that the answer is often “no.” Duross stated that it is “not enough to have a compliance program and a tone at the top,” but rather for a company to “make sure that it means it.”

As to the role of compliance officers, Duross said that vocal support within the business is critical to support the compliance officer so that he/she will not be ignored or willfully disobeyed. Although compliance departments are not viewed as profit centers, Duross encouraged companies to make compliance positions an attractive career track with room for advancement and promotion.

After his remarks, Duross was asked about the general lack of judicial scrutiny of FCPA enforcement actions. He talked about the three FCPA trials in 2009 and said that DOJ is “excited about the upcoming trials” and that the DOJ “welcomes judicial input” on the FCPA.

In his answer, Duross also mentioned the Nexus Technologies enforcement action and how in that action the parties fully briefed the “foreign official” element and that DOJ “won that case.” Although Duross conceded that the judge in that case did not issue a written opinion on the “foreign official” element, Duross did note that the judge, under Rule 11 of the Federal Rules of Criminal Procedure, was required, before accepting the plea, to make sure each element of the crime was met.

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

During a panel discussion on voluntary disclosure both Duross and Desmet answered questions posed by John Rupp (Covington & Burling - see here).

The first question posed by Rupp was - when is it a crime not to disclose a suspicion of bribery of a public official?

Desmet answered that the concept of materiality is important - would a reasonable investor consider the information important in making a buy or sell decision. Desmet said that the concept of materiality itself has two "sub-concepts": (i) quantitative materiality (something that impacts a company's financial statements) - he conceded that very few bribes are quantitatively material; and (ii) qualitative materiality a "complicated gray area" to use Desmet's words. He said that all bribes can be considered qualitatively material because they may "automatically trigger a books and records violation." Because of this, Desmet said that it is "prudent" for any issuer to approach the SEC with any "suspicion" of bribes "as soon as" the company learns of the improper payment. When an issuer makes such a disclosure, Desmet said that the Commission will give the company credit for doing so.

Duross answered the question by saying that from the FCPA unit's perspective, "if there is a bribe we want to hear about it, even if it is small" and that good advice is "to come in and let us know about it."

Rupp next posed the question - at what point do you expect a company to make a voluntary disclosure?

Duross said, "the earlier the better" although he did also say that the DOJ "does not want to get inundated with a bunch of false starts." Duross shared an example he said was "troubling" and that was a recent situation where the company voluntarily disclosed a few days after terminating employees in connection with the investigation. When the DOJ asked the company about the employees implicated in the conduct at issue, the company said we terminated them a few days ago and the company then proceeded to say that it no longer had access to the employees.

According to Duross, this "seemed like a bad decision" for the company to make and the conclusion he drew from the company's decison was that the company did not "want to make the employees available to us." Duross also added that while a company is often under no affirmative obligation to voluntary disclose, once the voluntary disclosure decision is made, the relationship between the DOJ and company counsel is all about trust and credibility.

Duross said that it is "incredibly difficult" for the DOJ to make important decisions affecting the company if the DOJ senses that the investigation was not done properly or if the DOJ senses that the company is not truly cooperating. Duross said that if the DOJ does not trust company counsel, it may ask the company to go back and redo the investigation of the conduct at issue. According to Duross, a reason a company should consider early in the process to voluntarily disclose is to perhaps save money. He said that the DOJ FCPA unit is "pretty reasonable" and that if a company comes in before the investigation is complete, the DOJ can have some input as to the scope of the investigation - which may turn out to be more limited than what the company may have thought was going to be expected.

In sum, Duross sees the benefits of an early voluntary disclosure as building trust and credibility and perhaps saving the company money.

Duross said that counsel should also not assume that a voluntary disclosure will result in a "passive approach" from the DOJ. Even if a company has voluntarily disclosed conduct, Duross said that the DOJ will go talk to witnesses and use the Mutual Legal Assistance Treaty process to gather evidence. Duross shared a story of outside counsel meeting with the DOJ and giving DOJ a big Powerpoint presentation, when the reality of the situation was that, through no fault of outside counsel, outside counsel had "absolutely no idea of what was going on" because DOJ, as a result of its independent fact-gathering, knew information that even outside counsel did not know.

Duross also cautioned companies to make accurate public statments during an investigation and voluntary disclosure process. On this issue, Duross shared that the DOJ has reached out to companies in the middle of an FCPA inquiry to let the company know that DOJ may disagree with various aspects of the public statements the company is making about the investigation.

Rupp asked - do companies in discussions with you, run the "footnote language by" the DOJ? Duross said, it depends on the practitioner. He did say "to be honest, we don't want to get into that level of detail in which we are blessing company filings." Duross did say though that if the company proposes language for a filing or public statement and the DOJ says "no comment" that this should be interpreted by the company as "probably not a good thing."

Desmet said that when he opens up an FCPA investigation, one of the first things he does is read the company's SEC filings, including a very detailed review of the company's MD&A section of the financial statements.

Rupp next asked questions about the SEC's new whistleblower provisions and asked what will happen if the company has a mere suscipion of an improper payment, the company is in the very early stages of an investigation, a document hold has been issued, electronic documents are being pulled, the company is lining up employees that may have knowledge - but that during this process, a whistleblower contacts the SEC. Rupp asked - will the company in this situation lose the benefits of voluntary disclosure because the whistleblower first contacted the SEC? (See here for my prior post on this issue).

Duross said that the above company probably would be negatively affected under the U.S. Sentencing Guidelines, and probably not receive the sentencing credit for voluntary disclosure, but that this should not be the beginning and end of the analysis. Duross said that there are "lots of different factors" the DOJ considers when resolving an FCPA inquiry per the DOJ's Principles of Prosecution of Business Organizations and that just because the company was technically not the first in the door does not mean that the DOJ will not try to achieve a "just and fair result." Duross stated that the SEC, not the DOJ, is in charge of the whistleblower program, but again stated that companies should not think the "world is going to be over" just because a whistleblower "is in first" even if that fact may impact the Sentencing Guidelines culpability score.

Desmet's answer was very similar on this issue. He noted that while final rules are yet to be issued as to the whistleblower program, he hopes that the Commission would not be rigid in the face of such a hypothetical. He said that if the company comes in a "few days or a few weeks after a whistleblower" that he would "like to think" that such a company would still get credit for self-reporting. In this type of situation, Desmet said that the whistleblower, if otherwise qualified under the provisions, would likely get his/her bounty and the company would likely still get the benefit of self-disclosure as well.

World Bribery & Corruption Compliance Forum - Comments By U.K. Officials

Day one of the World Bribery & Corruption Compliance Forum in London featured addresses by Dominic Grieve (the U.K. Attorney General) and Robert Amaee (Head of Anti-Corruption U.K. Serious Fraud Office). This post provides a summary overview of their comments.

Tomorrow's post will provide a summary overview of comments made by Charles Duross (Deputy Chief - Fraud Section, DOJ) and Thierry Olivier Desmet (Assistant Regional Director, FCPA Unit, SEC).

Before turning to Grieve and Amaee's remarks, the U.K. Ministry of Justice yesterday (see here) officially launched the consultation process to "gather the views of interested parties" on the Bribery Act that "will help shape guidance about procedures which commercial organisations can put in place to prevent bribery." In connection with the launch, the Ministry of Justice released this 35 page document which contains statements of various officials, draft guidance, and draft illustrative scenarios. Interested persons are encouraged to make their views known (see here).

Remarks of Attorney General Grieve

Attorney Grieve began by noting the "pernicious" effects of bribery and that tackling bribery requires an effective law - something he firmly believes the U.K. Bribery Act (with implementation slated for April 2011- see here for a prior post) will do. Attorney Grieve noted that the Bribery Act takes the U.K.'s antiquated bribery laws and modernizes these laws into a modern statute.

However, Attorney Grieve noted that one would be wrong to assume that the U.K. was ignoring bribery issues prior to passage of the Bribery Act. Indeed, he stated that even under the U.K.'s existing law strong enforcement has taken place and that it was "pleasing" that the U.K.'s recent enforcement actions were recognized in Transparency International's recent report (see here for a prior post on the subject).

Attorney Grieve provided a brief overview of the Bribery Act's offenses (see here for the Act itself), including, most notably the Section 7 offense for "failure to prevent bribery."

Attorney Grieve noted that while "it has been suggested that Section 7 creates a strict liability offense" he emphatically stated that "it does not." He drew upon his prior experience as a health and safety prosecutor and stated that the practice of having an occurrence of an event "and then reversing the burden of proof" is a "perfectly acceptable tool within [the U.K.] legal system." Regarding adequate procedures which indeed are a defense under Section 7, Attorney Grieve noted that "any company small or large" that puts into place a system of adequate procedures "has nothing to fear" when an employee or agent "goes off the rails" and makes a bribe payment.

Speaking of the Bribery Act more generally, Attorney Grieves said that "it is not a bad thing" that the Bribery Act views bribery broadly because in practice bribery can "take many forms" and the Bribery Act "needs to take account of that."

Attorney Grieve spent a few minutes talking about corporate hospitality. He said that the starting point is that corporate hospitality is "not illegal" and that the Bribery Act is "not intended to clamp down" on acceptable corporate hospitality. He did caution however that lavish hospitality "can be used as a bribe" and that the Bribery Act "must be capable of penalizing such conduct."

Attorney Grieve referenced a recent article in the Financial Times "Mining and Oil Groups Dig In For Bribery Act." The article notes concern by the mining industry over an example of a company arranging to fly a local Chilean mayor to a remote region of the country to view the company's production facilities and that during the trip, food and lodging would also be provided by the company. Attorney Grieve said he "found it difficult" how any "sensible person" could think that this was bribery. He contrasted this example with a company paying for a foreign public official to stay at the Ritz in Paris with "go-go girls" also provided.

In concluding his remarks on this issue, Attorney Grieve said that "common sense" needs to be taken into account when providing corporate hospitality.

Returning to the issue of adequate procedures, Attorney Grieve said that a company should have nothing to fear if it is "walking the walk, and talking the talk" when a rogue employee makes an improper payment. On the other hand, Attorney Grieve stated that that "those who don’t heed the warnings and don’t take the necessary steps have something to fear."

Remarks of Robert Amaee

Amaee began by stating that the SFO "welcomes the opportunity [delay of the Bribery Act] provides for business to digest and implement remedial actions" to put them in compliance with the new Bribery Act.

Amaee spoke of the "main problem" confronting SFO prosecutors under existing U.K. law and that is the "concept of a controlling mind" - in other words, to indict a case today, the SFO needs to show that "at least one controlling mind (a person at the board level or close to such a position) knew of and participated in the conduct at issue. Given the nature of the modern multinational corporation - where decision making is often made on a regional basis, Amaee said that this standard is difficult to meet.

Amaee noted that "Section 7 sweeps away that whole requirement" and establishes the new corporate offense of failing to prevent bribery. Under Section 7, Amaee explained that a corporate can be criminally liable if its employees or agents made improper payments - something he described as a shift in U.K. law and a new and "novel offense for U.K. law."

Amaee also commented how the Bribery Act will "significantly extend" the SFO's jurisdictional reach in prosecuting bribery offenses. He noted that if a company is registered anywhere in the world, but conducts some business in the U.K., that company can be prosecuted for failing to prevent bribery wherever in the world that bribe was paid.

Even with the new offense, Amaee stressed that the Bribery Act does provide some "comfort in the form of a defense" and that is the defense of adequate procedures.

Amaee also touched upon certain risk areas that he is often asked about.

The first is intermediaries. He noted that the SFO clearly recognizes that intermediaries serve a useful purpose by opening up doors in foreign markets, but that "in the past, some companies have chosen not to ask too many questions" of the intermediary or that companies have in the past "ignored clear warning signs" as to the intermediary. He noted that under the Bribery Act - neither of these past practices "will do" and that corporates should think about re-vetting their entire intermediary base. Amaee stated - "a board should always ask - where are we doing business and how, and that if the board doesn't like the answers it receives, it should be prepared to take the business elsewhere."

The second area of risk is joint venture. Amaee acknowledged that in certain sectors joint ventures are routine. However, he cautioned that companies should be mindful of not partnering up with a company that is not "willing to be open and transparent or not willing to demonstrate that its code of conduct does not match your own."

Like Attorney Grieve, Amaee also spoke of corporate hospitality. He noted that during passage of the Bribery Act, assurance was provided that the U.K. government will not seek to penalize legitimate corporate hospitality. He stated however that "lavish corporate hospitality can be used to secure an advantage and that the Bribery Act must be wide enough to cover it."

Amaee next spoke of the SFO's approach to combating bribery. He spoke of two strands - active engagement to assist companies improve its corporate culture and to maintain high standards and vigorous enforcement when dealing with corporates who believe in using corruption and thus put others at a disadvantage.

Amaee stated that the "criminal courts are the right place for the right defendants," but he also noted that criminal prosecution is not the "only means of effective enforcement."

He stated that the SFO has discretion to consider non-criminal resolutions such as civil sanctions and listed the following factors as relevant to the issue of resolution: sufficiency of the evidence, public interest considerations, concurrent jurisdiction issues, and potential debarement issues.

Amaee also spent a few minutes talking about the SFO's approach to individuals and he noted that the Bribery Act contains several sections under which individuals may be prosecuted - both rogue employees who bypass a company's adequate procedures and high-ranking corporate executives who consent or condone the improper conduct. Amaee stated that with the Bribery Act, the "stakes are higher than ever before for senior officers within a company" and that under the Bribery Act "it is no longer possible" for senior executives "to bury their head in the sand and look the other way."

During a panel discussion about self disclosure, Amaee was asked when a corporate should consider making the voluntary disclosure decision. In summary fashion, he said that the SFO's preference is "as soon as possible" because this allows the SFO a much better chance for it to tell the company what the SFO is thinking and that if the company self-reports early in the investigative process the company can actually end up saving money because the SFO may suggest a more limited scope of investigation than the company perhaps was considering.

Opening Remarks - World Bribery & Corruption Compliance Forum

Greetings from London where I am pleased to be chairing the World Bribery & Corruption Compliance Forum.

For a copy of my opening remarks see here.

Stay tuned for additional coverage, including the keynote address by Dominic Grieve (QC MP, Attorney General - U.K.), a special address by Charles Duross (Chief - Fraud Section DOJ), a special address by Robert Amaee (Head of Anti-Corruption - U.K. Serious Fraud Office) and commentary from other SFO, SEC, and other officials.

DOJ Seeks Sentencing Enhancement

The starting point in calculating a criminal fine for an FCPA anti-bribery violation is Section 2C1.1 of the U.S. Sentencing Guidelines (see here).

By way of example, see here (pg. 8) for how this section was used to determine the "total offense level" in the Alliance One plea agreement, here (pg. 6) for how this section was used to determine the base fine in the Technip deferred prosecution agreement.

Over the summer, the DOJ submitted its required report "commenting on the operation of the sentencing guidelines, suggesting changes in the guidelines that appear to be warranted, and otherwise assessing the [U.S. Sentencing] Commission's work."

In the June 28th letter (see here) from Jonathan Wroblewski (Director, Office of Policy and Legislation) to The Honorable William Sessions III of the Commission, Wroblewski states (see p. 5, footnote 4) the DOJ's belief that changes are needed to 2C1.1 to address crimes that occur overseas.

Specifically, Wroblewski stated that the Commission ought to add an enhancement in 2C1.1 - similar to the one found in 2B1.1 - that increases penalties for defendants who "increase the prosecutorial expenses associated with detection and investigation by committing a substantial part of their offense outside of the United States."

The enhancement found in 2B1.1(b)(9)(B) (see here) that the DOJ wants added to 2C1.1 offenses states: "If ... (B) a substantial part of a fraudulent scheme was committed from outside the United States; ... increase by 2 levels. If the resulting offense level is less than level 12, increase to level 12."

Although Wroblewski's letter does not specifically mention the FCPA, the starting point for calculating FCPA fines is 2C1.1, thus the enhancement DOJ seeks would increase base fine amounts in DOJ FCPA enforcement actions.

As applied to FCPA enforcement, such an enhancement would be ironic given that the DOJ routinely assesses fines significantly below even the floor suggested by the Sentencing Guidelines.

For instance, in the recent Universal Corp. enforcement actions (see here) the fine was 30% below the bottom of the sentencing guidelines range; in the recent Technip enforcement action (see here) the fine was 25% below the bottom of the sentencing guidelines range; and in the recent Snamprogetti enforcement action (see here) the fine was 20% below the bottom of the sentencing guidelines range.

A Favor ... Plus The Friday Roundup

A Favor

Each year, LexisNexis honors a select group of blogs that set the online standard for a given industry.

I am pleased to share that FCPA Professor is one of the nominated blogs for the LexisNexis Top 25 Business Law Blogs of 2010.

LexisNexis invites the business law community to comment on the list of nominees so that it can narrow the field to the Top 25.

The link to submit comments is here.

To submit a comment, you must register, but registration is free and does not result in sales contacts. The comment box is at the very bottom of the page and the comment period ends on October 8, 2010.

Many of the other blogs nominated are the work of multiple bloggers and/or for-profit entities. Thus, as a single blogger, I am honored to be included on this list. My mission remains the same since I launched FCPA Professor in July 2009. That is to inject a much needed scholarly voice into FCPA and related issues, to explore the more analytical “why” questions increasingly present in this current era of aggressive enforcement, and to foster a forum for critical analysis and discussion of the FCPA and related topics among FCPA practitioners, business and compliance professionals, scholars and students, and other interested persons.

I hope you value the content delivered to you each day on FCPA Professor and I thank you for your consideration.

Friday Roundup

HP speaks, checking in with the Africa Sting case, Smith & Wesson's reduced international shipments, BAE news, The Bribery Centre, and the International Anti-Corruption Academy ... it's all here in the Friday roundup.

HP Speaks

In April (see here) it was reported that German and Russian authorities were investigating whether Hewlett-Packard Co. (HP) executives paid millions of dollars in bribes to win a contract in Russia with the office of the prosecutor general of the Russian Federation. U.S. authorities then launched an investigation, something HP publicly acknowledged (see here). Yesterday, for the first time, HP "talked" about the investigation(s) in an SEC filing. In its 10-Q filing (see here) the company disclosed as follows:

"Russia GPO and Related Investigations

The German Public Prosecutor's Office ("German PPO") has been conducting an investigation into allegations that current and former employees of HP engaged in bribery, embezzlement and tax evasion relating to a transaction between Hewlett−Packard ISE GmbH in Germany, a former subsidiary of HP, and the Chief Public Prosecutor's Office of the Russian Federation. The €35 million transaction, which was referred to as the Russia GPO deal, spanned 2001 to 2006 and was for the delivery and installation of an IT network. The German PPO has recently requested information on several non−public sector transactions entered into by HP and its subsidiaries on or around 2006 involving one or more persons also involved in the Russia GPO deal.

The U.S. Department of Justice and the SEC have also been conducting an investigation into the Russia GPO deal and potential violations of the Foreign Corrupt Practices Act ("FCPA"). Under the FCPA, a person or an entity could be subject to fines, civil penalties of up to $500,000 per violation and equitable remedies, including disgorgement and other injunctive relief. In addition, criminal penalties could range from the greater of $2 million per violation or twice the gross pecuniary gain or loss from the violation. The U.S. enforcement authorities have recently requested information from HP relating to certain governmental and quasi−governmental transactions in Russia and in the Commonwealth of Independent States subregion dating back to 2000.

HP is cooperating with these investigating agencies."

Africa Sting

It's been a while since I posted on the Africa Sting case (see here for numerous prior posts). You'll recall that the 20+ defendants were snared in an undercover operation in which FBI agents posed as a Gabon "foreign official." Entrapment is sure to be a legal issue the defendants will formally raise - and indeed it has been an issue defense lawyers have already publicly stated. As noted in this Blog of Legal Times post, during a hearing earlier this week, defense counsel "are demanding access to internal Justice Department and FBI manuals that govern the planning and execution of undercover operations." According to the post, defense counsel have already claimed violations of DOJ/FBI policy in connection with the sting operation.

Smith & Wesson's Reduced Shipments

Speaking of the Africa Sting case, one of the company's indirectly, at least at this point, implicated in the matter is Smith & Wesson, the employer of Amaro Goncalves - one of the indicted individuals. In July (see here), the company disclosed the existence of a DOJ/SEC investigation and yesterday's 10-Q filing (see here) does not seem to add much from the previous filing. However, this sentence from pg. 26 of the filing caught my eye: "Pistol sales decreased 25.3%, driven by the reduction in consumer demand as well as reduced international shipments related to our investigation of the FCPA matter."

BAE News

The BAE bribery, yet no bribery enforcement action (see here) may be over in the U.S. and the U.K. Serious Fraud Office - BAE plea agreement may be waiting judicial approval in the U.K. (see here), but that does not mean that BAE's potential exposure in other jurisdictions is over. For instance, this recent Businessweek article suggests that South African authorities remain interested in corruption allegations concerning the purchase of fighter jets from BAE. In addition, according to this recent story in The Prague Post "the Czech Republic has asked the United States for help in its inquiry into alleged corruption in a 2002 deal to buy 24 fighter jets from ... BAE Systems." The DOJ's non-FCPA criminal information against BAE (see here) included allegations regarding the sale of fighter jets to the Czech Republic.

The Bribery Centre

The U.S. is not the only country with a vibrant and aggressively marketed anti-bribery sector. With implementation of the U.K. Bribery Act expected in April 2011, an industry is developing on the other side of the Atlantic as well. The Bribery Centre (here) seeks to provide a "unique resource to manage compliance to the Bribery Act 2010." Described as a "collaboration between Ten Alps plc and Venalitas Ltd" the Centre "aims to become the predominant online resource for those companies who need assistance to become compliant with this new landmark piece of legislation." Contributors include Clifford Chance and KPMG. As noted near the top of the site, you only have "29 weeks to implement adequate procedures."

International Anti-Corruption Academy

The IAAC as it is known (see here) recently had its coming out party. As described on its website, the IAAC is "a joint initiative by the United Nations Office on Drugs and Crime, the Republic of Austria, the European Anti-Fraud Office, and other stakeholders" and it "is a pioneering institution that aims to overcome current shortcomings in knowledge and practice in the field of anti-corruption."

Located near Vienna, Austria, the academy "will function as an independent centre of excellence in the field of anti-corruption education, training, networking and cooperation, as well as academic research."

*****

A good weekend to all.

My Two Cents On The FCPA's Affirmative Defenses

Students looking for scholarship ideas, should consider the Foreign Corrupt Practices Act.

Why?

There is a good chance that publication of an article will generate coverage and discussion on the blogosphere and elsewhere.

Case in point is Kyle Sheahen's "I'm Not Going to Disneyland: Illusory Affirmative Defenses Under the Foreign Corrupt Practices Act." (see here).

For prior coverage of Sheahen's article see here, here and here.

Sheahen's article is about the FCPA's two affirmative defenses - the so-called local law and promotional expense defenses.

Big picture, Sheahen terms these defenses as being "hollow," "illusory," and "useless in practice."

For starters, I respectfully disagree with Sheahen's statement that "business and businessmen accused of giving bribes to foreign officials have fared poorly in federal courts" as well as the implication that this somehow supports his thesis.

The three FCPA trials cited from 2009 - Frederick Bourke, William Jefferson, and Gerald and Patricia Greene were a mixed bag for the DOJ, not slam-dunk successes.

For starters, the jury found Jefferson not guilty of substantive FCPA anti-bribery violations (see here).

Sure, Bourke was found guilty by a jury of conspiracy to violate the FCPA and the Travel Act (as well as making false statements to the FBI) (see here), yet when the DOJ alleges that one is a key participant of a "massive bribery scheme" yet secures only a 366 day sentence (see here) from a judge who remarks that “after years of supervising this case, it’s still not entirely clear to me whether Mr. Bourke is a victim or a crook or a little bit of both” - I struggle to put such a case in the decisive "win" category for the DOJ. Plus, Bourke's case is currently on appeal (see here).

The Green case (see here) would seem to represent the cleanest win for the DOJ even though the sentencing judge expressed concerns whether the Green's conduct caused any harm in sentencing the couple to six months in prison thereby rejecting the DOJ's recommended ten year sentence. (See here).

Sheahen's article was published before the Giffen Gaffe (see here). Giffen aggressively mounted a legal defense and, whether for legal, political or other reasons, the case that began with charges that Giffen made "more than $78 million in unlawful payments to two senior officials of the Republic of Kazakhstan in connection with six separate oil transactions, in which the American oil companies Mobil Oil, Amoco, Texaco and Phillips Petroleum acquired valuable oil and gas rights in Kazakhstan" ended with a one-paragraph superseding information charging a misdemeanor tax violation. Further, back in 2004, Giffen was successful in having FCPA-related criminal charges dismissed when the trial court judge (see here) concluded that the DOJ offered "the slenderest of reeds" to support the collateral criminal charge.

Going back in time ...

George McLean won his FCPA case when the Fifth Circuit concluded, see 738 F.2d 655 (5th Cir. 1984) that the FCPA, as it then existed because of the subsequently repealed Eckhardt Amendment, barred prosecution.

Donald Castle and Darrell Lowry (two Canadian "foreign officials") won their FCPA-related cases, see 741 F.Supp. 116 (N.D. Tex. 1990), when the court dismissed their criminal indictments. The DOJ asserted that even though the officials could not be prosecuted under the FCPA, they could be prosecuted under the general conspiracy statute (18 USC 371) for conspiring to violate the FCPA. However, the court declined DOJ's invitation to extend the reach of the FCPA through the application of the conspiracy statute to Castle and Lowry.

Richard Liebo was acquitted, following a three week jury trial, of several counts including nine counts of violating the FCPA's anti-bribery provisions and one count of violating the FCPA's accounting and record keeping provisions. See 923 F.2d 1308 (8th Cir. 1991). He was found guilty of one FCPA count concerning his company's purchase of honeymoon airline tickets for the cousin and close friend of Captain Ali Tiemogo, the chief of maintenance for the Niger Air Force. In connection with this conviction, the Eighth Circuit found that the district court "clearly abused its discretion in denying Liebo's motion for a new trial" and remanded for a new trial.

Hans Bodmer didn't fare too badly either in 2004 when Judge Shira Scheindlin (the same judge in the Bourke case) held that the portion of the criminal indictment "charging Bodmer with conspiracy to violate the FCPA contravenes the constitutional fair notice requirement, and the rule of lenity demands its dismissal."

Of course, the DOJ has had its fair share of FCPA successes, but it remains a misperception that FCPA defendants have "fare[d] so badly" in FCPA trials as Sheahen, and others, have asserted.

Returning to the substance of Sheahen's article, he discusses the October 2008 Bourke decision by Judge Scheindlin (see 582 F.Supp.2d 535) - a case of first impression on the FCPA's local law defense.

Bourke argued that the FCPA's local law affirmative defense was applicable because, under Azeri law even though the payments were illegal, he was relieved from criminal responsibility when he reported the payments at issue to the President of Azerbaijan.

Judge Scheindlin disagreed, drawing a hard line between payments - the focus of the FCPA's local law affirmative defense in her mind - and the related issue of whether a person could not be prosecuted in the foreign country because a provision may relieve that person from criminal responsibility.

Judge Scheindlin concluded that "an individual may be prosecuted under the FCPA for a payment that violates foreign law even if the individual is relieved of criminal responsibility for his actions by a provision of the foreign law."

I agree with Sheahen's statement that Judge Scheindlin's decision of first impression narrowed the FCPA's local law defense "to the point of extinction."

I would go a step further and argue that Judge Scheindlin's decision would seem to violate the basic axiom that a statute should be construed so that effect is given to all of its provisions, so that no part will be inoperative or superfluous, void or insignificant.

In other words, courts should not suppose that Congress intended to enact unnecessary statutes and there is a presumption against interpreting a statute in a way that renders it ineffective.

The local law affirmative defense was added to the FCPA in 1988 and we must presume that Congress intended to enact the affirmative defense for some reason.

It was widely assumed by Congress in 1977 (when the FCPA was enacted), and by the Congress that amended the FCPA in 1988 to include the local law defense as well, that no nation's written law permitted bribery of its officials.

Yet, given Judge Scheindlin's narrow construction of the local law defense, the decision would appear to render the local-law defense (a statutory term that must have some meaning) inoperative, superfluous and insignificant.

As to the promotional expense defense, I would respectfully disagree with Sheahen's apparent conclusion that the defense is meaningless just because it has never been successfully invoked by an FCPA defendant at trial.

Because of the "carrots" and "sticks" the DOJ and SEC possess in an FCPA enforcement action, and because of the resolution vehicles typically offered to FCPA defendants to resolve an FCPA enforcement action (such as non and deferred prosecution agreements) there is much about the FCPA that has never been subjected to judicial scrutiny.

That does not mean however that an element or defense not successfully invoked at trial renders that element or defense meaningless or hallow.

Indeed, Sheahen discusses the FCPA Opinion Procedure Release process. Through this mechanism, those subject to the FCPA have gained degrees of comfort from DOJ "no enforcement" opinions that are based on the promotional expense defense.

Although the Opinion Procedure Releases are not precedent, countless others in the legal, business, and compliance communities find comfort in these releases, as well as the statute itself, when analyzing real-world conduct for potential FCPA exposure.

FCPA enforcement is in need of many fixes and indeed the Opinion Procedure Release process is likely not the best way for the DOJ to make its enforcement positions known.

However, these structural flaws in FCPA enforcement, coupled with the typical ways in which FCPA enforcement actions are resolved, necessarily leads to the conclusion that the FCPA's affirmative defenses are "hollow," "illusory," and "useless in practice."

*****

I provided Sheahen with my draft post so that he could respond and here is what he said.

"Professor Koehler,

Thank you for your thorough analysis. Although DOJ's trial record in FCPA prosecutions is not a clean sheet, the government has still been substantively successful in almost every FCPA case that has gone to trial. Further, the fact remains that no FCPA defendant has successfully invoked either the local law or the promotional expenses defense in an FCPA enforcement action.

Also, while I agree that the promotional expenses defense provides some guidelines for compliance with the FCPA, neither it nor the local law defense provide a meaningful defense to an enforcement action. Accordingly, Congress must take action to ensure that individual and corporate defendants have the actual ability to raise the affirmative defenses contemplated by the statutory scheme.

Thanks again and all the best,

Kyle Sheahen
sheahen2010@lawnet.ucla.edu