Hold the Phone

"Hold the phone" - the ball has yet to drop on the 2009 enforcement year.

Today, the DOJ and SEC announced (see here and here) resolution of an FCPA action against UTStarcom Inc. (UTSI)

The phone analogy is fitting as UTSI is a global telecommunications company that designs, manufacturers and sells network equipment and handsets.

This matter is the latest in a surge of FCPA scrutiny as to the telecommunications industry (Dec. 2009 individual indictments involving Haiti Teleco, April 2009 Latin Node, Inc. action, the Siemens matter concerned (in part) its telecommunications division, Dec. 2007 enforcement action against Lucent Technologies - among others).

According to the DOJ release, UTSI acknowledged responsibility (pursuant to a non-prosecution agreement) "for the actions of UTS-China [its wholly-owned subsidiary) and its employees and agents, who arranged and paid for employees of Chinese state-owned telecommunications companies to travel to popular tourist destinations in the United States, including Hawaii, Las Vegas and New York City."

The release notes that the "trips were purportedly for individuals to participate in training at UTSI facilities" but that "UTSI had no facilities in those locations and conducted no training." According to the release, "UTS-China then falsely recorded these trips as 'training' expenses, while the true purpose for providing these trips was to obtain and retain lucrative telecommunications contracts."

Based on this conduct, UTSI agreed to "pay a $1.5 million penalty, implement rigorous internal controls and cooperate fully with the Department."

According to the release, DOJ agreed to the non-prosecution agreement based on the company's "voluntary disclosure, thorough self-investigation of the underlying facts, the cooperation provided by the company to the Department, and the remedial efforts undertaken by the company."

In a parallel action, the SEC announced that UTSI settled FCPA anti-bribery, books and records, and internal control charges by agreeing to pay a $1.5 million penalty and provide the SEC "with annual FCPA compliance reports and certifications for four years."

According to the SEC complaint (here), "[b]etween 2002 and 2007, UTSI paid nearly $7 million for hundreds of overseas trips by employees of Chinese government-controlled telecommunications companies that were customers of UTSI, purportedly to provide customer training" when "[i]n reality, the trips were entirely or primarily for sightseeing."

The SEC's allegations are broader than the DOJ's and the complaint also notes the following:

"During the same time period, UTSI provided other gifts and benefits to foreign government customers, including paying for them to attend executive training programs at U.S. universities. UTSI also provided foreign government customers or their family members with work visas and purportedly hired them to work for UTSI in the U.S., when in reality they did no work for the company. UTSI also made payments to purported consultants in China and Mongolia who provided no documented services, under circumstances that showed a high probability that the payments would be used to bribe foreign government officials."

According to the SEC complaint, the executive training sessions "covered general management topics and were not specifically related to UTSI's products or business." The complaint further alleges that expenses in connection with these sessions included "travel, tuition, room and board, field trips to nearby tourist destinations, and a cash allowance of between $800 and $3,000 per person."

The SEC's complaint also contains this allegation as to Thailand:

"In 2004, as part of its effort to expand its business outside China, UTSI submitted a bid for a sales contract to a government-controlled telecommunications company in Thailand. While UTSI's bid was under consideration, UTSI's general manager in Thailand spent nearly $10,000 on French wine as a gift to agents of the government customer, including rare bottles that cost more than $600 each. The manager also spent $13,000 for entertainment expenses for the same customer in an attempt to secure the contract."

None of the alleged government owned or controlled telecommunications are identified and for those of you scoring at home, this is yet another FCPA anti-bribery enforcement action based on the government's untested and unchallenged legal theory that employees of alleged state-owned or state-controlled entities are "foreign officials" under the FCPA.

This is not the first time a telecommunications company has settled an FCPA enforcement action in late December based on improper travel/training benefits.

In late December 2007, Lucent Technologies Inc. settled an enforcement action based on substantively similar allegations (see here, here and here).

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A Look Back (and Forward)

This week marks not only the end of a year, but also a decade.

So let’s take a look back at FCPA enforcement circa 2000.

In 2000, the FCPA was indeed “on the books” (the statute was enacted in 1977), yet there was little in terms of FCPA news or enforcement actions.

A "U.S. newspapers and wires" search for the FCPA in the 2000 picks up 64 “hits” and among the more noteworthy stories from that year were the following:

(1) BellSouth corporation disclosed that the SEC launched a probe into whether one of its Latin American subsidiaries violated the FCPA and the company also disclosed that its outside counsel had already investigated the conduct and found that no violations had occurred; and

(2) BF Goodrich Company announced that it was using a web-enabled training system to educate its employees about work-related legal issues including the FCPA.

One could even attend a few FCPA training sessions in 2000 as the search picked up programs sponsored by both the City of New York Bar and the Washington DC Bar.

There was even one FCPA enforcement action in 2000!

In December 2000, the SEC announced (here) the filing of a settled cease-and-desist proceeding against International Business Machines Corporation (“IBM”).

According to the SEC order (here), IBM violated the books and records provisions of the FCPA based on the conduct of its indirect, wholly-owned subsidiary, IBM-Argentina, S.A. The conduct involved “presumed illicit payments to foreign officials” in connection with a “$250 million systems integration contract” between Banco de la Nacion Argentina (“BNA”) (an apparent “government-owned commercial bank in Argentina) and IBM-Argentina.

The SEC order finds that, in connection with the contract, IBM-Argentina’s Former Senior Management (without the knowledge or approval of any IBM employee in the U.S.) caused IBM-Argentina to enter into a subcontract with an Argentine corporation (“CCR”) and that “money paid to CCR by IBM-Argentina in connection with the subcontract was apparently subsequently paid by CCR to certain BNA officials.”

According to the Order, IBM-Argentina paid CCR approximately $22 million under the subcontract and “at least $4.5 million was transferred to several BNA directors by CCR.”

According to the Order, the former Senior Management “overrode IBM procurement and contracting procedures, and hid the details of the subcontract from the technical and financial review personnel assigned to the Contract.” The Order finds that IBM-Argentina “recorded the payments to CCR in its books and records as third-party subcontractor expenses” and that IBM-Argentina’s financial results were incorporated into IBM’s financial results filed with the Commission.

Based on the above conduct, the SEC concluded that “IBM violated [the FCPA’s books and records provisions] by failing to ensure that IBM-Argentina maintained books and records which accurately reflected IBM-Argentina’s transactions and dispositions of assets with respect to the Subcontract.” IBM consented to a cease and desist order and consented to entry of a judgment ordering it to pay a $300,000 penalty.

A Washington Post article about the IBM action notes that it "is the SEC's first in three years involving overseas bribery."

In 2000, there were no DOJ FCPA prosecutions (against corporations or individuals).

The first DOJ corporate FCPA prosecution of this decade did not occur until 2002.

In that action (here) Syncor Taiwan, Inc. (a wholly-owned, indirect subsidiary of Syncor International Corporation) pleaded guilty to a one-count criminal information charging violations of the FCPA. According to the DOJ release, "[t]he company admitted making improper payments [approximately $344,110] to physicians employed by hospitals owned by the legal authorities in Taiwan for the purpose of obtaining and retaining business from those hospitals and in connection with the purchase and sale of unit dosages of certain radiopharmaceuticals."

The release further notes that the company "made payments [approximately $113,000] to physicians employed by hospitals owned by the legal authorities in Taiwan in exchange for their referrals of patients to medial imaging centers owned and operated by the defendant."

Based on this conduct, the release notes that the company agreed to a $2 million criminal fine - "the maximum criminal fine for a corporation under the FCPA" (as noted in the release). The release also notes that "Syncor International has consented to the entry of a judgment requiring it to pay a $500,000 civil penalty, the largest penalty ever obtained by the SEC in an FCPA case.".

From this retrospective, two issues jump out.

First, as demonstrated by the IBM action, the notion that an issuer may be strictly liable for a subsidiary's (even if indirect) violations of the FCPA books and records is nothing new. (See here for a prior post on this issue).

Second, as demonstrated by the Syncor action, DOJ's interpretation of the "foreign official" element to include non-government employees employed by state-owned or state-controlled entities stretches back to earlier this decade. (See here for prior posts on this issue).

This retrospective also highlights just how significantly FCPA enforcement has changed this decade.

For starters, the same "U.S. newspapers and wires" search for the FCPA (year to date) picks up nearly 700 "hits" (a ten-fold increase from ten years ago). In addition, if one wanted to, one could attend (it seems) an FCPA seminar, training session, bar event, etc. every week in a different state.

Further, I bet my Jack LaLanne Power Juicer received this holiday season that if the IBM enforcement action were to have recently occurred, the SEC would have also charged FCPA internal control violations as well as sought a significant disgorgement penalty given that the alleged improper payments in that matter helped secure a $250 million contract.

Moreover, the $2 million "maximum criminal fine for a corporation under the FCPA" (as noted in the Syncor DOJ release) seems laughable when viewed in the context of the $450 million Siemens criminal fine (Dec. 2008) or the $402 million Kellogg Brown & Root criminal fine (Feb. 2009). Also laughable is the $500,000 "largest penalty ever obtained by the SEC in an FCPA case" (as noted in the Syncor release) when viewed in the context of the $350 million Siemens penalty or the $177 million KBR/Halliburton penalty.

Has the conduct become more egregious during this decade or have enforcement theories and strategies simply changed? I doubt it is the former.

Why have enforcement theories and strategies changed? One of the best, candid explanations I've heard recently is that FCPA enforcement for the government "is lucrative." (See here).

One of the great legal "head-scratchers" of this decade is how DOJ and SEC's enforcement of the FCPA against business entities has taken place almost entirely outside of the normal judicial process due to the fact that corporate FCPA prosecutions are resolved through non-prosecution or deferred prosecution agreements, settled through SEC cease and desist orders, or otherwise resolved informally. The end result is that in many cases, the FCPA means what DOJ and SEC says it means.

My hope for the New Year and decade is that many of the untested and unchallenged legal theories which are now common in FCPA enforcement will actually be subject to judicial scrutiny and interpretation.

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Happy Holidays

Got some last-minute holiday shopping on the "to-do" list today?

You may want to consider this for that valued colleague, an item sure to turn heads and earn the recipient a pass from FCPA scrutiny for having a well-communicated FCPA policy.

Looking to spend a little extra on that special someone this holiday season?

You may want to consider this item.

In the spirit of the season, I include a clip from my favorite holiday movie - "A Christmas Story."

While it is indeed unfortunate when a company becomes the subject of an FCPA enforcement action or when an individual faces the prospect of losing his or her liberty because of an FCPA violation, I must confess I do feel a bit like Ralphie in "A Christmas Story" every time an FCPA enforcement action is released.

Clueless as to what I am talking about - here is the clip.

It goes something like this.

The FCPA enforcement action is released by the DOJ or SEC.

I immediately seek seclusion so that I can de-code the messages in the otherwise bare-bones, conclusory DOJ non-prosecution or deferred prosecution agreement or SEC complaint and consent decree.

The family is calling and I am needed elsewhere.

I yell out, “just a minute.”

I am close to cracking the code and the messages therein.

The calls persist, but I’m getting closer and the tension is mounting.

I’m almost there.

And then … the message.

The enforcement officials have concluded, yet again, that employees of state-owned or state-controlled enterprises are “foreign officials!”

***

Thanks for reading, all the best this Holiday season, and be sure to stop back in a few days.

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The Investigative Agency That Prefers Not to Investigate

The Serious Fraud Office ("SFO") in the United Kingdom is similar to the U.S. DOJ.

According to the SFO's website (here), it "investigates fraud and corruption." Elsewhere on the website (here) it notes that the SFO is the "lead agency" in the U.K. "for investigating and prosecuting cases of domestic and overseas corruption." Elsewhere on the website (here) is a specific page as to how the SFO "investigates and prosecutes" and the page notes that a thorough investigation "often includes examining vast quantities of documents which have often been left in a deliberately obscure and fragmented form."

All sounds rather intense from an investigative standpoint.

Problem is, the SFO recently stated that it would prefer not to investigate bribery and corruption cases!

As discussed elsewhere (see here), the SFO recently made public additional guidance as to its July 2009 memo titled "Approach of the Serious Fraud Office to Dealing with Overseas Corruption." (See here for my prior post on this memo).

While it is commendable for a government agency to provide more guidance to those subject to a law, the following sentence in the SFO letter (see here) caused me to pause (let alone read multiple times):

"Our very strong preference is that all investigative work should be carried out by the professional advisers [of the company disclosing a potential issue] and that it is not necessary for the SFO to conduct any investigation itself."

Have we seriously come to the point (on both sides of the Atlantic) where the government agencies tasked with investigating and prosecuting bribery and corruption cases no longer view it as their responsibility to investigate the factual circumstances supporting the charges?

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Happy Birthday!

I was born in 1977.

Yet for most of my life, I was neglected and nobody cared or talked about me.

However, about ten years ago, my caretakers suggested that I change my look (get a new haircut, change my wardrobe, those sort of things).

Boy did that help.

In some circles at least, I am now the most popular person in the room.

Lawyers travel to the far reaches of the globe just to determine if I am relevant, corporations publicly disclose potential dates with me, there are seminars and training sessions about me, lawyers run to Washington D.C. (my birthplace) to tell my caretakers how relevant I am (when in fact I may not be relevant at all) ... and, I even hear there are a few blogs devoted to me.

Who am I?

Why of course I am the FCPA and today is my 32nd birthday!

*****

On December 19, 1977, the FCPA was enacted. On December 20, 1977, President Carter signed the FCPA into law.

Hosting an FCPA birthday party?

Here is the signing statement to read just before the candles are placed on the cake. After cake, instead of a game of “pin the cash-filled suitcase on the foreign official” how about a discussion as to whether the enacting Congress and President Carter would even recognize certain enforcement theories which have become a hallmark of current enforcement of the FCPA.

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Lighthouses and Buoys - Part II

Earlier this week, the DOJ announced (see here) the indictment of John Warwick, the former President of Ports Engineering Consultants Corporation. Warwick is charged (see here) with conspiracy to pay bribes to former Panamanian officials to obtain contracts to maintain lighthouses and buoys along Panama’s waterways. The substance of the allegations against Warwick are substantively similar to the previous charges against Warwick’s co-conspirator Charles Jumet (see here for the prior post). As noted in that post, Jumet pleaded guilty.

*****

I hate to be a Grinch this time of year, but why does DOJ continually use the term “foreign government official” in its charging documents when that term/element doesn’t even appear in the FCPA? (see para. 1 of the indictment). For more on the incorrect/inconsistent use of this key FCPA term see here.

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A Double Standard?

A government official (and his wife) tour a foreign vineyard and castle and spend an afternoon at a ski resort in the Alps. A company can’t foot the bill directly, so it funds a group that then picks up the tab.

Another government official is flown across the world to help close a business deal for a large corporate financial backer (and friend).

Sounds like some potential FCPA issues, right?

Wrong.

Why?

Because the government officials involved are not “foreign officials,” but rather U.S. government officials. (See here for the recent story in the NY Times. The WSJ also recently ran a similar story here - although less focused on privately funded travel).

For those interested in other examples, you will want to visit LegiStorm.com (here) a web site that allows one to search such trips by U.S. official, sponsor, most active sponsor, most expensive trips, etc.

This raises the question of whether there is 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"?

The U.S. has a domestic bribery statute (18 USC 201) (see here) which has similar (yet not identical) elements to the FCPA. Should not there at least be some level of intellectual and enforcement consistency with these statutes?

No doubt many of the trips identified by LegiStorm had a core, legitimate purpose. However, often times payment of a "foreign official's" travel expenses also have a core, legitimate purpose. The FCPA enforcement action most "on-point" is the 2007 action against Lucent (see here and here).

It's just not payment of a "foreign official's" travel expenses which seem to be subject to a double standard, but also corporate donations as well. It's common knowledge in this country that corporate interests donate, either directly or indirectly, to political campaigns, political action groups, or other causes to curry favor with politicians (or shall I say "participate in the political process").

Yet, if a company makes even a bona fide charitable contribution abroad, they will be subject to FCPA scrutiny. The FCPA enforcement action most "on-point" is the 2004 action against Schering-Plough (see here) involving a donation to a legitimate Polish castle restoration foundation where the founder/president of the foundation was also the director of a government health fund which provided money to hospitals throughout Poland for the purchase of pharmaceutical products.

All interesting issues/questions to ponder in what seems to be another example of how FCPA enforcement has indeed because the unique creature that it is. (See here for a prior post on this issue).

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Lack of Pride (And That CITGO Sign Too)

If the SEC were to put titles on its complaints, the above may be fitting for the complaint released (see here) earlier this week against Bobby Benton (the former Vice President, Western Hemisphere Operations for Pride International, Inc.).

In its complaint (see here), the SEC alleges that "Benton was responsible for, among other things, ensuring that Pride conducted its Western Hemisphere operations in compliance with the FCPA, that adequate controls were in place to prevent illegal payments, and that the company's books and records were accurate."

Despite this position, the SEC alleges that: (i) "Benton authorized the payment of $10,000 to a third party, believing that all or a portion of the funds would be given by the third party to a Mexican customs official in return for favorable treatment by the official regarding certain customs deficiencies identified during a customs inspection of a Pride supply boat; (ii) "Benton learned that a customs agent engaged by Pride's Mexican subsidiaries paid approximately $15,000 to a Mexican customs official to ensure that the export of a rig would not be delayed due to customs violations; and (iii) Benton concealed the bribe payments made by the manager of the Venezuelan branch of a French subsidiary of Pride from Pride's internal and external auditors by "redact[ing] references to the Venezuelan payments in an action plan responding to an internal audit report."

The SEC further alleges that "[d]espite his knowledge, and in one instance authorization, of the Venezuelan and Mexican bribes, Benton signed two false certifications in connection with audits and reviews of Pride's financial statements denying any knowledge of bribery." The financial results of the Mexican and Venezuelan entities were consolidated with Pride's for purposes of financial reporting.

The "foreign officials" involved are Mexican customs officials / customs agents and an official of Petroleos de Venezuela S.A. (PDVSA), the Venezuelan state-owned oil company.

Based on the above conduct, the SEC charged Benton with violating the FCPA's antibribery provisions, aiding and abetting FCPA violations, and aiding and abetting violations of the FCPA's books and records and internal control provisions.

Most SEC FCPA enforcement actions (whether against a company or an individual) are settled on the same day the civil complaint is filed. Not so in this case and the SEC complaint notes that Benton asserted his 5th amendment privilege against self-incrimination when subpoenaed to testify by the SEC. Will the SEC actually be put to its burden of proof in an FCPA case?

Pride International's most recent disclosure on this issue is in its 10-Q filed on November 2, 2009 (see here - pgs. 17-18). As noted in the disclosure, what began as an inquiry into Latin America operations has spawned into a substantial worldwide review of the company's operations.

*****

The Benton complaint mentions Petroleos de Venezuela S.A. (PDVSA), the Venezuelan state-owned oil company.

The DOJ/SEC's interpretation of the "foreign official" element of an FCPA anti-bribery violation is well known by now - all employees of state-owned or state-controlled entities (SOEs), such as PDVSA, are "foreign officials" regardless of title or position.

Further, all employees of SOE wholly-owned subsidiaries are considered "foreign officials" under this interpretation. In fact, a business entity does not even need to be majority owned by a SOE for its employees to be considered "foreign officials" by DOJ/SEC (see the KBR/Halliburton enforcement action (see here paras 13-14) where officers and employees of Nigeria LNG Limited (NLNG) are deemed "foreign officials" despite the fact that NLNG is owned 51% by a consortium of private multinational oil companies (see here).

Applying DOJ/SEC's untested and unchallenged interpretation to PDVSA can, well, let's just say it can lead to some rather weird results.

Why?

One of PDVSA's wholly-owned subsidiaries is Citgo Petroleum Corporation ("CITGO") (see here).

Thus, under DOJ/SEC's view, all CITGO employees are "foreign officials" under the FCPA regardless of title or position.

This despite the fact that CITGO is a Delaware corporation based in Houston.

In other words, CITGO is both subject to the FCPA and all of its employees (under the DOJ/SEC interpretation) are "foreign officials." How's that for a little mental gymnastics.

At the very least, this gives readers something to think about the next time they attend a ball game at Fenway Park (see here).

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Siemens ... The Year After

One year ago this week, Siemens agreed to pay $800 million in combined U.S. fines and penalties to settle FCPA charges for a pattern of bribery the Department of Justice (“DOJ”) termed “unprecedented in scale and geographic scope.” (see here).

The charged conduct involved improper payments to obtain or retain (among other business) transportation, telecommunication, energy and health sector contracts in (among other places) Argentina, China, Mexico, Nigeria, Russia, and Venezuela.

According to the DOJ, for much of Siemens’ operations around the world, “bribery was nothing less than standard operating procedure.” Because Siemens (a German-based company) has shares listed on a U.S. stock exchange and because certain of the improper conduct had a U.S. nexus, the company was subject to the FCPA.

The Siemens matter easily remains the largest and most high-profile FCPA matter since the law was enacted in 1977.

Yet, on the same day Siemens agreed to resolve the FCPA matter, the company also announced that a U.S. government agency issued a formal determination declaring Siemens a “responsible contractor.” This designation assisted Siemens in continuing to do business with the U.S. government even though an entity found in violation of the FCPA may be barred from doing business with the federal government under Office of Management and Budget guidelines. (see here).

In the year since resolution of the Siemens FCPA matter, the U.S. government continues to do substantial business with the company it recently charged with engaging in a pattern of bribery “unprecedented in scale and geographic scope.”

This U.S. government business has helped Siemens outperform its competitors in a difficult recessionary environment and much of the company’s recent success is the direct result of government stimulus programs around the world.

Reacting to these government stimulus programs, Siemens executives stated that the company was in “an excellent position to generate additional business.” In June 2009, Siemens issued a press release noting that “the shares of the stimulus program that Siemens can address are the largest in the U.S.” (see here). Siemens’ executives proclaimed that the government stimulus programs should have a “stabilizing effect on our business.”

On such “stabilizing effect” on Siemens’ business has been the American Recovery and Reinvestment Act, the $787 billion stimulus bill passed by Congress and signed by President Obama in February 2009 to stimulate the American economy.

According to Recovery.gov (see here) (a U.S. government website designed “to allow taxpayers to see precisely what entities receive Recovery money ..”), Siemens’ business units have already been awarded several dozen contracts funded by U.S. taxpayer stimulus dollars. These contracts have been awarded by the following government agencies: Department of Defense, Department of the Air Force, Department of the Army, Department of Transportation, Department of Health and Human Services, Department of Energy, Department of Commerce, Department of Housing and Urban Development, and the General Services Administration.

According to Recovery.gov, even the DOJ (i.e. the same government agency that prosecuted Siemens less than 365 days ago for a pattern of bribery the agency termed “unprecedented in scale and geographic scope”) awarded a Siemens business unit a contract funded with stimulus dollars.

It is not just the federal government that continues to do business with Siemens in the immediate aftermath of its unprecedented bribery scandal. Since December 2008, Siemens’ business units have also been awarded: a $135 million service contract with the University of Pennsylvania Health System (see here); a $205 million order for light rail vehicles from the San Diego Metropolitan Transit System (see here); and a $140 million energy contract from the Northern California Power Agency (see here).

Siemens business with the U.S. government (and other units of government) in the immediate aftermath of its unprecedented bribery scandal raises several questions.

Does it even matter, aside from the fines/penalties and associated costs of getting caught, if a company violates the FCPA?

The above information suggests that the answer is no, so the question becomes should it matter? Should U.S. taxpayer dollars be awarded to a company which less than 365 days ago settled a bribery scandal “unprecedented in scale and geographic scope”?

The DOJ frequently speaks about deterrence as being a primary function of FCPA enforcement. But what deterrence is there when an FCPA violator (let alone the most egregious violator in the history of the FCPA) can immediately get U.S. government business, including from the same government agency that prosecuted it for violating the FCPA? Can FCPA enforcement ever be effective if Siemens is the template for future enforcement?

Siemens post-scandal business with the U.S. government also raises the question of whether Siemens secured the contracts at issue in the FCPA enforcement action, not because of the payments, but simply because Siemens offered the best products for the best prices?

Is this the reason the U.S. government continues to do business with Siemens in the immediate aftermath of its unprecedented bribery scandal? If so, what does this say about the rhetoric that accompanies a typical FCPA enforcement action (i.e. the company bribed to get business)?

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U.S. Congressman Alleges Bribery at Airbus

U.S. Representative Todd Tiahrt (R-Kan) (see here) has alleged that Airbus and its parent company European Aeronautic Defence and Space Company ("EADS") pay bribes in order to get business.

In a recent article in Human Events Online (see here, scroll down a bit), Tiahrt states that "agents for the Airbus company have openly said that yes we do use bribery, in fact we budget for it."

Tiahrt's accusation follows an October 2009 letter (see here) he sent to the Deputy Secretary of Defense in which he stated that "[i]t is well documented that EADS has bribed foreign officials in buying products instead of American products." Tiahrt states that "EADS has been subject to bribe-related scandals in Belgium, Canada, India, Kuwait, Switzerland and Syria." He further notes that the "[t]he US intelligence community has characterized EADS as the most corrupt corporation in the world" and urges the Deputy Secretary of Defense to read the CIA briefing on EADS.

Tiahrt's main concern appears to be that "[f]oreign companies, such as EADS, do not have to comply with the [FCPA]."

For the record, I am not so sure that Tiahrt is correct. For instance, EADS (the corporate parent of Airbus) has ADRs registered with the SEC. (see here). Further, Airbus has several business locations in the U.S. (see here).

******

Staying on the topic of foreign companies, a German court recently ordered two subsidiaries of MAN SE (see here) to pay $221 million in fines in connection with a wide-ranging investigation concerning bribes paid to secure sales of trucks and buses. MAN's shares traded in the U.S. "over the counter" on the "pink sheets." (see here).

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Coming Soon ... Panalpina

No, it's not another Hollywood FCPA movie like Syriana (see here), although it sort of sounds like it.

Rather it is the Panalpina enforcement action. And its coming soon. According to Panalpina, a Swiss company and one of the world's leading suppliers of forwarding and logistics services, "last week" it "commenced settlement discussions" with the DOJ concerning its FCPA exposure and the matter is "coming to a close." (see here).

Not familar with the Panalpina matter?

In February 2007, DOJ announced (see here) the guilty pleas of three Vetco International Ltd. subsidiaries for violating the FCPA. In the plea documents, the Vetco entities acknowledged making improper payments to employees of the Nigerian Customs Services "through a major international freight fowarding and customs clearance company."

In July 2007, Panalpina announced (see here) that the above guilty plea triggered a number of events. First, Panalpina's U.S. subsidiary was requested to produce documents relating to the services it provided to the Vetco entities in Nigeria. Second, and more broadly, Panalpina announced that "several other customers have announced to U.S. authorities the review of their practices related to Nigerian importation procedures." Further, the company noted that "U.S. authorities have extended the scope of their review to Panalpina's documents related to services into Nigeria, Kazakhstan and Saudi Arabia for a limited number of customers."

Soon thereafter, Panalpina "suspended part of its service offering in Nigeria including its temporary importation services for oil and gas customers." (see here). Later, Panalpina stopped all domestic services in Nigeria. (see here).

When announced, the Panalpina FCPA enforcement action is likely to be broad in scope and potentially entangle other companies as well.

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Some Data to Chew On

It's been a while (see here) since I passed along what seems like a constant stream of FCPA survey results.

This morning in my inbox were the results of the Dow Jones State of Anti-Corruption Compliance Survey which I pass along (here).

The survey included responses from 182 company executives worldwide and among the more interesting survey results is that "51% of companies delayed key business plans such as new business partnerships and entry into new or developing markets and another 14% abandoned them completely because of legal questions arising from unclear anti-corruption regulations."

The managing director of Risk & Compliance at Dow Jones & Company noted that the "findings appear to indicate improvements should be made" including that "regulators must provide clearer guidance to help companies better understand and comply with current laws."

Today is U.N. International Anti-Corruption Day.

In observance of this day, the U.S. government agencies which enforce the FCPA (the Department of Justice and the Securities and Exchange Commission) should commit to providing those subject to the FCPA clear guidance, reasoned rationale and legal support for certain of their FCPA prosecution theories. As reflected by the Dow Jones survey results, such clarity and transparency is greatly needed.

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Indicting a "Foreign Official"

Yesterday, the DOJ announced (see here) the unsealing of an indictment (see here) against Joel Esquenazi, Carlos Rodriguez, and Marguerite Grandison which charges (among other things) conspiracy to violate the FCPA and substantive FCPA violations for an alleged scheme to bribe two former employees of Haiti Teleco, the alleged "state-owned national telecommunications company."

Esquenazi and Rodriguez are former executives of a privately owned, Florida-based telecommunications company and Grandison was the President of Telecom Consulting Services Corp., a Florida based company which served as an intermediary.

The unsealed indictment is the latest chapter in this matter; in May 2009, the DOJ announced (see here) the guilty pleas of Juan Diaz and Antonio Perez in connection with the same scheme.

This matter is also yet another example of an FCPA enforcement action in which the "foreign official" is an employee of an alleged state-owned or state-controlled entity.

That, however, is not why this enforcement action is noteworthy.

It is noteworthy because DOJ also indicted Robert Antoine and Jean Rene Duperval - the alleged "foreign officials." According to the indictment, Antoine and Duperval both served as the "Director of International Relations of Haiti Teleco" and were responsible for negotiating contracts with international telecommunications companies on behalf of Haiti Teleco.

Of course, the charges were not FCPA charges, because the FCPA only covers "bribe-payers" not "bribe-takers" (see here, here, for prior posts on this subject).

Rather the charges against Antoine and Duperval were money laundering conspiracy and/or substantive money laundering charges.

According to the DOJ release, Antoine is from "Miami and Haiti" and Duperval is from "Miramar, Fla. and Haiti." Further, according to the indictment, both individuals had bank accounts in the U.S. and these accounts were used in connection with the bribery scheme. (I wonder if Washington Mutual, Wachovia, or Miami Federal Credit Union were aware that Haitian "foreign officials" were among its customers!)

To my knowledge this is the first time "foreign officials" have been specifically charged as defendants in connection with an FCPA enforcement action. This indictment of "foreign officials" comes on the heels of AG Holder's recent speech (see here) in which he stated that the U.S. government was committed to recovering funds obtained by "foreign officials" through bribery.

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Dubai "Foreign Officials"?

Financial news the last two weeks or so has been dominated by news that the Dubai government apparently will not back the debt of Dubai World, Dubai's wholly-owned investment vehicle.

Because I tend to view news with "FCPA goggles on," the Dubai story got me thinking again about a critical FCPA topic and that is the DOJ/SEC's untested and unchallenged theory that all employees (regardless of rank or title) of alleged state-owned or state-controlled entities are "foreign officials" under the FCPA. See here for my prior posts on this subject. This theory has been applied not just to business entities wholly or majority owned by a foreign government, but also minority owned entities as well (see the KBR / Halliburton matters involving Nigeria).

So just who are Dubai "foreign officials"?

Dubai World owns a host of real estate, leisure and financial service assets both inside and outside of Dubai. In fact "the sun never sets on Dubai World" (at least that is what it says on its website see here) and its investment portfolio extends across 100 different cities in the world.

Many of Dubai World's entities bear all the resemblences of a private sector business, such as public stock offerings, loan agreements from private banks, etc.

Are such entities, which in theory are suppose to advance the public sector goal of their government "owners or controllers," state-owned or state-controlled entities even though another purpose of these entities is to maximize profit for the benefit of private investors?

Consider also that "westerners" run some of Dubai World's main holdings. Under the Dubai World umbrella is Nakheel ("the world's largest privately held real estate company") (see here). The CEO of Nakheel is an Australian (see here). Same with Istithmar World (an investment house 100% owned by Dubai World, which is in turn wholly owned by the Government of Dubai) (see here). The CEO of Istithmar is an American (see here).

Would DOJ/SEC consider an Australian and an American to be Dubai "foreign officials" under the FCPA simply because they work for Dubai World?

If DOJ/SEC prosecution theories in other FCPA enforcement actions were to be consistently applied, the answer (it seems) would have to be yes.

This result would seem to be at odds with common sense and, more importantly, the intent of Congress in enacting the FCPA (as reflected in the FCPA's extensive legislative history).

The Dubai World example is not unique, there are countless other examples that could also be discussed.

With foreign government owned sovereign wealth funds making investments around the world (including in U.S. companies) and with alleged "state-owned or state-controlled" entities listing public shares on various exchanges and otherwise doing business around the world, there has never been a more opportune (and critical) time for the government to make clear its reasoning and support for its prosecuting theory on this issue.

This is not merely a side issue.

Most FCPA enforcement actions in recent years (i.e. the time period during which FCPA enforcement has escalated) involve not core government officials, but rather "foreign officials" only under this untested and unchallenged theory. Case in point, the FCPA enforcement action announced late this afternoon (see here) involving employees of Haiti's alleged state-owned national telecommunications company - a matter I will post on shortly.

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Did An FCPA Enforcement Action Contribute to a Foreign Coup?

Law firms crank out FCPA news releases, client alerts, etc. all the time to inform clients and potential clients about FCPA risks or the who, what, and where of a recent enforcement action ending with a few compliance lessons.

These pieces are informative, but rarely do they raise provocative questions.

That is, until Gregory Paw's (Pepper Hamilton LLP) recent piece (see here) in which he asks whether the Latin Node FCPA enforcement action in the U.S. contributed to the June 2009 coup of Honduran president Manuel Zelaya.

By way of background, in April 2009, DOJ announced (see here) that Latin Node, Inc. (a privately-held telecommunication services company headquartered in Miami) pled guilty to violating the FCPA's anti-bribery provisions in connection with improper payments made to officials in Honduras and Yemen in order to obtain and retain business. The criminal information (see here) details Latin Node's efforts to obtain and retain business with Hondutel (the Honduran government-owned telecommunications company) and charges that despite recognized "financial weaknesses" in Latin Node's proposal, Hondutel ultimately selected Latin Node for the agreement because of various improper payments Latin Node made or authorized to various Honduran "foreign officials."

*****

Hungry for more?

Yesterday, Magyar Telekom, the leading Hungarian telecommunications service provider with shares traded on a U.S. exchange, issued what is perhaps the longest, most detailed press release ever about a potential FCPA issue (see here).

The potential issue was first voluntarily disclosed in February 2006 (see here - p. 14) and yesterday the company announced that it's Audit Committee issued the final report of FCPA's counsel investigation.

I will leave it for you to think about potential application of the issues/questions I raised earlier this week in this post.

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A Trip Around the World

Grab your bags and your passport, it's time for a quick trip around the world.

First stop, Germany.

Siemens

In December 2008, Siemens (a global corporation organized under the laws of Germany with shares listed on the New York Stock Exchange since March 2001) agreed to pay $800 million in combined fines and penalties to settle FCPA charges for a pattern of bribery the Department of Justice ("DOJ") termed "unprecedented in scale and geographic scope." The combined fines and penalties were easily the largest ever levied against an FCPA violator.

This week, Siemens announced (see here) that it "has come to an agreement about settlements with six further former Board members against whom damages were claimed in connection with past cases of corruption in the company." See (here) for press coverage.

Next stop, the U.K.

SFO Charges Former DePuy Executive

The U.K.'s Serious Fraud Office ("SFO") (an enforcement agency similar to the U.S. DOJ), recently announced (see here) that Robert John Dougall, the former Vice President of Market Development of DePuy International Limited was charged with conspiracy for "making corrupt payments and/or giving other inducements to medical professionals working in the Greek public healthcare system." The SFO has previously indicated (see here) that it seeks to generally model DOJ's enforcement strategies, and that model now seems to include a broad interpretation of the potential universe of recipients of improper payments (i.e. not just core government officials, but also employees of public healthcare systems). There is greater cooperation between law enforcement agencies around the world in investigating cases of alleged improper payments, a fact highlighted by the SFO release which notes that the case "was referred to the [SFO] by the [DOJ] and accepted in March 2008." Depuy (see here) is "part of the Johnson & Johnson family of companies." In February 2007, Johnson & Johnson disclosed a potential FCPA issue and the company's most recent announcement on the issue is in its November 2009 10-K filing (see here).

Next stop, Australia.

Money to Print Money

The Age of Melbourne has reported (see here) that Securency International (see here) and certain of its executives are being investigated by the Australian Federal Police for alleged breaches of Australia's criminal code which prohibit payments to foreign government officials to obtain a business advantage. According to the article, Securency (according to its website - a world leader in secure polymer substrate technology and the supplier of a range of unique substrates which are used for the printing of banknotes and other security documents), is also under scrutiny in the U.K., Vietnam, and Nigeria. The article notes that the Securency matter could be Australia's first prosecution for foreign bribery.

Final stop, the beaches of the Bahamas.

Kozeny Extradition Hearing

While Frederic Bourke (see here) prepares his appeal, Viktor Kozeny, the alleged master-mind of the bribery scheme, continues to enjoy life in the Bahamas as U.S. government attempts at extradition have thus far failed. This week, the U.S. government's appeal hearing was heard in the Bahamas. See here for press coverage.

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Voluntary Disclosures and the Role of FCPA Counsel

Dyncorp International Inc. ("Dyncorp"), a provider of "specialized, mission critical professional and support services for the U.S. military, non-military U.S. governmental agencies and foreign governments" (according to its recent 10-Q filing) (see here) recently disclosed a potential FCPA issue.

Page 19 of its filing states:

"We have identified certain payments made to expedite the issuance of a limited number of visas and licenses from foreign government agencies that may raise compliance issues under the U.S. Foreign Corrupt Practices Act. The payments, which we believe totaled approximately $300,000 in the aggregate, were made to sub-contractors in connection with servicing a single existing task order that the Company has with a U.S. government agency. We have retained outside counsel to investigate these payments. We are in the process of evaluating our internal policies and procedures and are committed to improving our compliance procedures. During the past week, we voluntarily brought these matters to the attention of the U.S. Department of Justice and the Securities and Exchange Commission. We cannot predict the ultimate consequences of these matters at this time, nor can we reasonably estimate the potential liability, if any, related to these matters. However, based on the facts currently known, we do not believe that these matters will have a material adverse effect on our business, financial condition, results of operations or cash flow. We have not recorded any reserves with respect to this matter." (emphasis added).

This disclosure, along with the more recent disclosure that Dyncorp's Senior Vice President, Chief Compliance Officer and Executive Counsel was terminated (see here) has been covered by the Wall Street Journal (see here and here) and has been discussed elsewhere (see here).

I inject the following question/issue into the conversation (so to speak).

Why did Dyncorp voluntarily disclose to DOJ/SEC conduct that is arguably not even a violation of the FCPA? More broadly, what do such voluntary disclosures of potential FCPA issues say about the potential conflict of interests FCPA counsel has in advising companies as to the important disclosure issue.

First things first.

As readers of this blog likely know, many FCPA enforcement actions result from voluntary disclosures companies make to DOJ and (if an issuer) to SEC.

The reason?

There are some "carrots" out there.

First, "The Principles of Federal Prosecution of Business Organizations" (see here) (a.k.a. the former Thompson Memo which is now included in the US Attorney Manual) state that one of the factors a prosecutor should consider in deciding whether to criminally charge a company is the "value of cooperation" and the "corporation's timely and voluntary disclosure of wrongdoing and its cooperation with the government's investigation..." (see 9-28.700).

Second, Chapter Eight of the Federal Sentencing Guidelines (specifically s. 8C2.5(g)) (see here) will reduce an organization's "culpability score" (which is key in calculating a company's fine upon conviction as well as the company's fine in a settlement) if: "the organization (A) prior to an imminent threat of disclosure or government investigation; and (B) within a reasonably prompt time after becoming aware of the offense, reported the offense to appropriate governmental authorities, fully cooperated in the investigation, and clearly demonstrated recognition and affirmative acceptance of responsibility for its criminal conduct"

See (here) for what Assistant AG Breuer recently told an FCPA audience about voluntary disclosure.

A company deciding whether or not to voluntarily disclose to the government will thus have to weigh the risk of the government finding out about the conduct in the absence of the company's voluntary disclosure (and thus likely assume the risk of a harsher fine/penalty) vs. voluntarily disclosing the conduct to the government, yet being able to take advantage of the above mentioned "carrots".

In weighing these options in the face of evidence of an actual FCPA violation, companies often choose the voluntary disclosure route - although the merits of the voluntary disclosure route and how to assess the leniency are issues subject to debate.

The weighing of these options when confronted with evidence of an actual FCPA violation is one thing.

However, and as demonstrated by Dyncorp's recent disclosure, companies often also voluntarily disclose conduct to DOJ/SEC that may only potentially violate the FCPA.

Perhaps the analysis is similar to that above; however, is there any other area of law where companies (and their counsel) race to Washington to tell the government not about an actual violation of law, but merely about a potential violation of law (save perhaps for the DOJ's antitrust leniency program (see here) which nevertheless involves actual violations)?

Before addressing the issue of what potential conflict of interest FCPA counsel may have in advising companies as to the important disclosure issue (particularly where the disclosure merely involves a potential FCPA violation), a bit about why the conduct Dyncorp disclosed is arguably not even a violation of the FCPA.

I've written before (see here) about the Fifth Circuit's decision in U.S. v. Kay, 359 F.3d 738 (5th Cir. 2004) on the FCPA's obtain or retain business element and how the court concluded that payments to customs officials to reduce customs duties and sales tax could fall within the FCPA, but that such conduct does not automatically constitute an FCPA violation. The Kay case is one of the few instances in which a court has rendered a substantive FCPA decision.

Post-Kay there has been an explosion in FCPA enforcement actions involving payments made to secure foreign government licenses, permits, and certifications or otherwise involving custom duties and the like. However, because these enforcement actions have not been contested, it remains an open question as to under what circumstances such payments can indeed satisfy the FCPA's obtain or retain business element.

Dyncorp's disclosure ("[w]e have identified certain payments made to expedite the issuance of a limited number of visas and licenses from foreign government agencies") involves the type of payments at issue in Kay and one reason why the conduct Dyncorp disclosed is arguably not even a violation of the FCPA is the equivocal nature of the Kay decision (the only case law on this subject).

Here is the real head-scratcher though.

The Dyncorp payments were not made in order to obtain or retain business with any foreign government or foreign government entity, but rather assisted Dyncorp obtain or retain business with the U.S. government.

Has there ever been an FCPA enforcement action where the questionable payments were made to assist the payor in obtaining or retaining business with the U.S. government? To my knowledge no, and if anyone is aware of such an enforcement action please do let me know.

True, the DOJ's "Lay-Person's Guide to the FCPA" (see here) (the DOJ's interpretation of the statute) notes "that the business to be obtained or retained does not need to be with a foreign government or foreign government instrumentality."

However, as the Kay court noted, the payments still need to be in connection with foreign business (i.e. seemingly not business with the U.S. government).

The Kay court framed the issue as follows: "...how attenuated can the linkage be between the effect of that which is sought from the foreign official in consideration of a bribe (here, tax minimization) and the briber's goal of finding assistance or obtaining or retaining foreign business with or for some person, and still satisfy the business nexus element of the FCPA?" (emphasis added).

Later in the opinion, the Kay court framed the issue as follows: "...the question whether the defendants' alleged payments constitute a violation of the FCPA truly turns on whether these bribes were intended to lower ARI's cost of doing business in Haiti enough to have a sufficient nexus to garnering business there or to maintaining or increasing business operations that ARI already had there, so as to come within the scope of the business nexus element as Congress used it in the FCPA." (emphasis added).

In holding "that Congress intended for the FCPA to apply broadly to payments intended to assist the payor, either directly or indirectly, in obtaining or retaining business for some person, and that bribes paid to foreign tax officials to secure illegally reduced customs and tax liability constitute a type of payment that can fall within this broad coverage" (emphasis added), the Kay court still nevertheless focused on business in a foreign country (... "the FCPA's legislative history instructs that Congress was concerned about both the kind of bribery that leads to discrete contractual arrangements and the kind that more generally helps a domestic payor obtain or retain business for some person in a foreign country...) (emphasis added).

The Kay court's focus on foreign business is consistent with the FCPA's extensive legislative history which also focuses on payments made to secure foreign business, not business with the U.S. government.

This provides another reason why Dyncorp's disclosure of "certain payments made to expedite the issuance of a limited number of visas and licenses from foreign government agencies" in "connection with servicing a single existing task order that the Company has with a U.S. government agency" is arguably not even a violation of the FCPA.

So the question remains, why did Dyncorp disclose this conduct - conduct that could only potentially violate the FCPA?

This leads to the final issue/question - what potential conflict of interest does FCPA counsel have in advising companies as to the important disclosure issue (particularly where the disclosure only involves a potential FCPA violation)?

By raising this issue/asking this question, I am not accusing Dyncorp's counsel of anything (I don't even know which firm is representing Dyncorp). Rather, I ask this question in the context of the Dyncorp's disclosure because it seems to present (for the above reasons) the perfect "case" in which to raise this lurking issue / ask this lurking question (even though the same question could legitimately be asked in connection with other corporate voluntary disclosures of conduct that could potentially violate the FCPA).

It truly is the "elephant in the [FCPA] room" in my estimation.

Here is the potential conflict of interest as I see it. FCPA counsel has every incentive (it would seem) to nudge a corporate client to make the disclosure.

Simply stated, no disclosure, the "case" (for all practical purposes) is over and thus no more billable hours.

Conversely, with the disclosure the "case" continues meaning more billable hours.

Often times if a voluntary disclosure is made the "case" continues for several more years as DOJ (and if applicable) SEC will demand a wide range of factual information and documents involving the conduct at issue.

Morever, often times the "case" gets expanded because a favorite question of the enforcement agencies is something along the following lines - "if Business Unit A was involved in this conduct in Country A, how do we know that Business Unit A was not also involved in this conduct in Country B, and, more broadly, how do we know that the Company (in general) was also not involved in this same conduct in Countries C,D, and E (all FCPA high-risk jurisdictions)?

Because cooperation with the government's investigation is a prominent factor a prosecutor weighs in deciding whether to criminally charge a business entity under the above described "Principles of Prosecution", a corporate client invariably (yet reluctantly) will accept FCPA's counsel's recommendation to broaden the "case" to demonstrate cooperation with the DOJ/SEC's investigation.

Next thing the company knows, it is paying for a team of lawyers (accompanied by forensic accountants and other specialists) to travel around the world to answer DOJ/SEC's questions even though the voluntary disclosure that got this whole process started involved conduct that may not actually violate the FCPA.

Because FCPA counsel's "worldwide review" will often not be deemed credible unless it comes back to DOJ/SEC with at least something of concern or suspicion, FCPA counsel will often disclose several small, non-material, practically meaningless issues which also could potentially violate the FCPA.

DOJ/SEC, to demonstrate the thoroughness of its investigation, will often include these "tag-along" facts in the ultimate resolution documents (most often a non-prosecution or deferred prosecution agreement).

Thus, disclosure often times leads to significantly more work, and more billable hours for FCPA counsel. Because FCPA counsel is able to demand premium billing for its services given the high-profile, sensitive nature of the issue, the disclosure decision is literally a several hundred thousand / multimillion dollar issue for FCPA counsel and could mean the difference between several more months / years of work and no additional work.

To be clear, I am not suggesting any actual conflict of interest by Dyncorp's counsel (or any other FCPA counsel for that matter).

Rather, I am pointing out that a potential conflict of interest is present in FCPA counsel's disclosure advice given the significant difference in billable hours hinging on the disclosure decision.

This potential conflict of interest is hardly ever discussed, and this is not surprising given that few "outside" of the FCPA bar (given the opaque nature in which FCPA enforcement actions are resolved) even know how the disclosure and resolution process actually works to ask the question.

Here is another issue that is hardly ever discussed.

The same enforcement officials who often encourage the voluntary disclosure route, and speak of the credit that will be given to a company when it voluntarily discloses, are the same individuals who often rotate in and out of government service and the FCPA bar. Again, I am not suggesting any actual conflict of interests by these individuals.

However, these potential conflict of interest issues (i.e. the "elephants in the [FCPA] room") should not be shoved aside in analyzing why there are so many FCPA voluntary disclosures (including of conduct that may only potentially violate the statute) and why FCPA enforcement is indeed the unique creature that it is.

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Monitors

Most FCPA enforcement actions against companies are resolved through a non-prosecution or deferred prosecution agreement (NPA's / DPA's).

Many NPA's / DPA's require the company to engage a compliance monitor for a set time period (generally 2-4 years).

Although monitors are not the "rage" they used to be a few years ago, recent FCPA enforcement actions against Control Components, Inc., KBR/Halliburton, and Siemens have included some form of a compliance monitor.

In a recent speech to an FCPA audience, Assistant AG Breuer (see here) indicated that:

"In appropriate cases, [DOJ] will also continue to insist on a corporate monitor, mindful that monitors can be costly and disruptive to a business, and are not necessary in every case. That said, corporate monitors continue to play a crucial role and responsibility in ensuring the proper implementation of effective compliance measures and in deterring and detecting future violations."

Those interested in corporate monitors (whether in the FCPA context or otherwise) will want to review a recent report on monitors from the Government Accountability Office. (see here).

Among other interesting numbers are the following:

Since 1993 through September 2009, DOJ has entered into 152 NPA's or DPA's.

Of the 152 agreements, 48 required the appointment of a compliance monitor.

What does it take to become a monitor? A DOJ background certainly doesn't hurt. GAO found that of the 48 NPA's or DPA's that required the appointment of a monitor, 42 different individuals were selected. Of those 42, 23 (approximately 55%) were former DOJ officials, something many find controversial in that a prior DOJ position could affect the monitor's independence and impartiality.

Although the GAO report does not specifically discuss (or identify) the monitors in FCPA enforcement actions, a May 2008 DOJ letter to the House Judiciary Committee (see here) does list corporate entities along with the monitor appointed. To my knowledge, the following were FCPA enforcement actions: Aibel Group/Vetco Ltd., Baker Hughes, Ingersoll Rand, InVision Technologies, Micrus, Monsanto, Paradigm, Schnitzer Steel, Statoil, and York.

To see what one of those "FCPA monitors" has to say (here) is the excerpt from the Corporate Crime Reporter interview.

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If the SEC Was An Issuer ...

The FCPA’s books and records and internal control provisions require issuers (i.e. publicly-traded companies) to: (i) “make and keep books, records, and accounts, which, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the issuer;” and (ii) devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that (among other things) transactions are executed in accordance with management’s general or specific authorization, transactions are recorded as necessary to maintain accountability of assets, and access to assets is permitted only in accordance with management’s general or specific authorization.

The SEC enforces these provisions against issuers.

Often times, the SEC enforces these provisions against issuers aggressively (see here and here).

It seems to not matter to SEC enforcement officials whether the improper recording in the company’s books or records occurred at a far flung, fifth-tier subsidiary by a rogue employee or whether the issuer actually had knowledge that a far flung subsidiary was engaged in improper conduct.

The SEC’s position is that if the far-flung subsidiary’s financial results are consolidated with the parent company issuer’s financial results for purpose of financial reporting, then the subsidiary’s violation is the issuer’s violation.

Further, it seems to not matter to SEC enforcement officials whether the violation resulted from a rogue employee acting contrary to clearly articulated and well communicated company policies and procedures prohibiting the improper conduct because, after all, if the company’s internal controls were effective, rogue employees would not exist or, if they do exist, proper controls would be put in place to monitor their behavior before it occurred.

Every so often, it is fun to spend a few moments in “hypothetical land.”

The issue in “hypothetical land” today is - if the SEC was an issuer.

If the SEC was an issuer, it would have some serious FCPA books and records and internal control issues to deal with as a result of the Government Accountability Office’s ("GAO's") recent “Financial Audit – Securities and Exchange Commission’s Financial Statements for Fiscal Years 2009 and 2008” (see here).

As detailed in the audit, the GAO “identified six significant deficiencies that collectively represent a material weakness in SEC’s internal control over financial reporting.” In short, the GAO concluded that “SEC’s internal control over financial reporting was not effective as of September 30, 2009.”

Most notably, the GAO found material weaknesses that have: (i) “resulted in unsupported entries and errors in the general ledger"; (ii) “ineffective financial reporting controls and general ledger system reporting limitations"; and (iii) “ineffective processes and related documentation concerning budgetary transactions.” (p. 5).

Among other specifics, in terms of the general ledger system and the supporting processes the SEC uses to prepare its financial statements, the GAO found that:

“unauthorized personnel can view, manipulate, or destroy data” (p. 64);

SEC controls to compensate for the general ledger limitations “are cumbersome and largely detective nature, increasing the risk that errors or fraud that could result in a misstatement to the financial statements would not be prevented” (p. 65);

in connection with deposit account activity, the SEC's processes are “labor-intensive” and that “it does not have dedicated resources assigned to address this issue” (p. 69); and

"obligations […] were not always recorded timely and were not always supported by documentation evidencing the obligation as having been approved by an authorized individual” (p. 70).

Under the FCPA, not only is it important for issuers to have effective internal controls, but issuers must also monitor those internal controls to make sure that they are effective.

The GAO was critical of the SEC on this score as well.

The report notes:

“We also identified weaknesses in SEC’s monitoring process which indicate a lack of effective oversight of controls. Management’s monitoring of controls should include whether the controls are operating as intended and include an assessing of the design and operation of controls on a timely basis and taking necessary corrective actions. As discussed previously, we found that SEC’s monitoring procedures did not address all identified risks. Further, SEC’s management oversight was not sufficient given the frequency and sensitivity of the control activity, and monitoring procedures were not always completed in accordance with SEC’s stated testing plan.” (p. 71-72).

According to the GAO – “[b]ecause of inherent limitations, [the SEC's] internal control[s] may not prevent or detect and correct misstatements due to error or fraud, losses, or noncompliance.” (p. 8).

Because of the above identified deficiencies, if the SEC was an issuer - would: (i) the SEC's main DC office be strictly liable for branch office deficiencies; (ii) the SEC disgorge all of its "profits" connected (no matter how remotely) to the improper recording or the deficient internal controls; and (iii) would high-level SEC officials be accountable under "control person" theories for the books and records and internal control violations?

As readers of this blog know, all of the above "theories" are straight from recent SEC enforcement actions against issuers.

So next time an FCPA practitioner and his/her corporate client representative are seated across the table from an SEC enforcement official who asks, "how could this payment have not been recorded properly in subsidiary X's books and records, how could the issuer not put in place effective internal controls, how could those controls not be monitored and assessed, etc. etc." the most candid response just might be "I don't know, you tell me - such issues happen at the SEC as well."

One more thing, when enforcing the FCPA's books and records and internal control provisions against issuers, the SEC insists on remedial measures and wants to see evidence of those remedial measures being put into place "yesterday." An issuer comment, such as "this takes time," would likely fall on deaf ears.

Yet, here is what SEC Chairman Mary Schapiro had to say about the GAO report and its findings of various deficiencies: “some deficiencies are likely to be resolved during the first half of FY 2010, while others – which have been the result of long-term and growing constraints affecting our information technology and human resources – will take longer to fully resolve.” (p. 29). This statement was also repeated by Kristine Chadwick, SEC CFO and Associate Executive Director (p. 33).

Alas, time to come back to reality, the SEC is not an issuer, but a couple minutes in "hypothetical land" does provide some useful perspectives as to the SEC's enforcement of the FCPA's books and records and internal control provisions.

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Turkey and the FCPA

The following FCPA enforcement actions have involved (in whole or in part) business conduct in Turkey.

York International Corp. (Oct. 2007)

In October 2007, York International Corporation (York), a global provider of heating, ventilation, air conditioning, and refrigeration products and services, agreed to pay approximately $22 million in combined fines and penalties to settle DOJ and SEC enforcement actions principally relating to improper payments made by various subsidiaries to the Iraqi government under the United Nations Oil-for-Food Program. The enforcement action also involved certain other improper payments made in connection with government projects in Bahrain, Egypt, India, Turkey and the United Arab Emirates. (see here).

Delta & Pine Land Co. (July 2007)

In July 2007, the SEC announced a settled FCPA enforcement action against Delta & Pine Land Company, a Mississippi-based cottonseed company, and its subsidiary, Turk Deltapine, Inc. According to the SEC, between 2001 - 2006, Turk Deltapine made payments of approximately $43,000 to officials of the Turkish Ministry of Agricultural and Rural Affairs in order to obtain various governmental reports and certifications that were necessary for Turk Deltapine to obtain, retain and operate its business in Turkey. Per the complaint, the improper payments were discovered by Delta & Pine, but instead of halting the payments, the payments continued via a third party supplier and pursuant to an inflated invoice scheme. Based on the above conduct, Delta & Pine and Turk Deltapine jointly agreed to pay a $300,000 civil penalty and engage an independent compliance consultant. (see here and here).

Micrus Corp. (March 2005)

In March 2005, Micrus Corporation, a privately-held California medical device manufacturer, agreed to a two year non-prosecution agreement with the DOJ to resolve its FCPA liability in connection with over $100,000 in payments (disguised in the company's books and records as stock options, honorariums and commissions) to physicians employed at publicly owned and operated hospitals in France, Turkey, Spain, and Germany.(see here) and here)

*****

Thanks for reading, safe travels, and may your turkey be golden brown!

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A Bribery Scheme Hatched at the "Eggs Benedict Place"

The DOJ announced today (see here) that John Joseph O'Shea was recently arrested for his alleged role in a conspiracy to bribe Mexican foreign officials to secure contracts with the Comision Federal de Electridad ("CFE"), an apparent Mexican state-owned utility company (see here). In addition to charging conspiracy to violate the FCPA, the indictment contains twelve substantive FCPA charges (among other charges).

According to the unsealed indictment (see here), O'Shea was the General Manager of Texas Business A, a business that provides products and services to electrical utilities in a number of foreign markets. According to the indictment, one of O'Shea's responsibilities was approving payments to sales representatives.

According to the indictment, Texas Business A is a business unit of Subsidiary A (a company with its principal place of business in Sugar Land, Texas) and Subsidiary A, in turn, is a subsidiary of Corporation A (a company headquartered and incorporated in Switzerland with publicly-traded American Depositary Shares on the NYSE).

In other words, both Subsidiary A and Corporation A are subject to the FCPA and may be the focus of a forthcoming enforcement action. Also of note is that Mexican Company X, Intermediary Company O (a company incorporated in and headquartered in Mexico) and Intermediary Company S (a company incorporated in Panama and headquartered in Mexico) are all alleged to be "an agent of a domestic concern" under 78dd-2(h)(1). DOJ recently noted (see here) that it is willing to go after agents and intermediaries which facilitate bribe payments and the "agent of a domestic concern" designation would seem to be setting the table for a possible enforcement action against such companies as well.

According to the indictment, one customer Texas Business A did business with is CFE and officials N,J,C and G at CFE had influence over decisions concerning Texas Business A's contracts with CFE

(Sorry for the alphabet soup, but this is how the indictment reads).

According to the indictment, Texas Business A obtained multiple contracts with CFE while using Mexican Company X (including its principal, Fernando Maya Basurto) as its sales representative under several commission-based agreements.

The indictment alleges that O'Shea conspired and agreed with Basurto, Subsidiary A, Texas Business A, and the intermediary companies and others to make improper payments to Mexican "foreign officials" to obtain or retain business for Subsidiary A and Texas Business A in violation of the FCPA and that O'Shea did indeed offer, authorize, or make the improper payments indirectly through others to the CFE officials in violation of the FCPA.

According to the indictment, the payments assisted Texas Business A secure two contracts with CFE worth approximately $81 million in revenue.

According to the indictment, the improper payments were concealed through a series of financial transactions, first to U.S. bank accounts in the name of Basurto and certain of his family members, then through false invoices received from Basurto in the names of the intermediary companies, and then to the "foreign officials."

According to the indictment, after O'Shea was terminated from Texas Business A, he, Basurto, and others tried to cover up their conduct after learning that Corporation A had disclosed the suspected payments to the DOJ, SEC and Mexican authorities.

In describing O'Shea's cover up, the indictment states, "On or about April 27, 2005, O'Shea sent Basurto an e-mail that read, in part, "It seems my lawyer thinks it is OK to use a private e-mail such as yahoo, as it would seem much more difficult for anyone to get the exchanges - if it is a company email it belongs to them. I believe [sic] we should alter opur [sic] normal routine; meaning not meet at the 'eggs benedict' place."

Consistent with DOJ's recent statements on this issue, the indictment seeks from O'Shea forfeiture of approximately $3 million in proceeds derived from his improper conduct.

As noted in the DOJ's release, Basurto recently pleaded guilty to a one-count criminal information (see here) charging him with conspiracy to violate the FCPA. The DOJ news release also notes that a Mexican citizen had pleaded guilty for his role in the bribery scheme.

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The Compendium

Earlier this week, Trace International Inc. (a leading non-profit membership association focused on anti-bribery compliance) released its Compendium – a fully searchable (and free) online data-base of all FCPA enforcement actions – as well as anti-bribery enforcement actions and investigations in other signatory countries to the OECD anti-bribery convention. (see here).

As noted in the past, there is little substantive FCPA case law.

Thus FCPA enforcement actions serve (unfortunately) as de facto case law and FCPA practitioners are often left to read the “tea leaves” from the enforcement actions (at the urging the enforcement agencies) as to legal theories, etc.

As they say, "it is what it is."

In any event, after spending some time “in” the Compendium, I have that “kid in the candy store” type of feeling.

Interested in 2008 enforcement actions, brought by the DOJ, involving Chinese officials, that resulted in a deferred prosecution agreement? The answer requires only a few clicks.

Interested in 2007 enforcement actions, brought by the SEC, charging books and records violations, resulting in disgorgement? The answer requires only a few clicks.

Interested in all enforcement actions concerning business conduct in Burkina Faso … well, there is no such an action, but you can bet that if there is, it will be in the Compendium.

The Compendium is a treasure trove of information and will be of great use to FCPA practitioners and scholars (both academics and law students) and any one else interested in FCPA developments.

I have read just about every piece of FCPA scholarship published and one thing continually amazes me. That is the frequency in which an author states a position without ever discussing or even footnoting an enforcement action that is seemingly in direct conflict with the position stated. Granted there is little FCPA case law, but those writing in the FCPA area should be aware of how, and under what circumstances, the statute is actually enforced even if such enforcement do not result in case law. The end result is that many FCPA articles have the "authority of scholarship," yet contain some rather basic errors as to how the FCPA is enforced, against whom it is enforced, and under what factual circumstances it is enforced.

The enforcement actions have never been hard to find (they are on the DOJ and SEC website, there is the Shearman & Sterling FCPA Digest (see here) and Foley & Lardner's FCPA website (see here) among other sources).

And now there is the grand-daddy of them all - the fully searchable Compendium.

Happy searching.

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Statoil Charges Dismissed

In October 2006, Statoil ASA (a Norwegian company with shares traded on a U.S. exchange - and thus an "issuer" under the FCPA) settled an FCPA enforcement action by agreeing to pay $21 million in combined DOJ and SEC fines and penalties for improper payments that assisted the company in securing contracts for the South Pars field in Iran.

The DOJ action was settled through a three-year deferred prosecution agreement (see here).

Under a deferred prosecution agreement, criminal charges against the company are filed with a court, but prosecution of the charges is deferred if the company adheres to the requirements of the agreement (such as acknowledging and accepting responsibility for the alleged conduct, cooperating with the DOJ's continued investigation, engaging a compliance monitor, and implementing more stringent FCPA policies and procedures, etc.) throughout the term of the agreement.

At the end of the term, usually 2-3 years, and if the company has complied with its obligations, DOJ agrees that it will seek dismissal of the charges.

Deferred prosecution agreements and non-prosecution agreements have become the most common method of resolving corporate FCPA enforcement actions.

The Statoil prosecution was precedent setting at the time as it was the first time the DOJ brought criminal FCPA charges against a non-U.S. company.

The DOJ announced today (see here) that Statoil satisfied its obligations under the deferred prosecution agreement and that a court has formally dismissed the charges.

In this respect, Statoil may again be precedent setting as I am not aware of any other instance in which the DOJ has issued a press release announcing the end of a deferred prosecution agreement (even though it would seem that several others have ended).

If my recollection is correct and if this perhaps is a change in DOJ policy, "hear-hear" as it increases transparency.

Other posts which have mentioned Statoil can be found here and here.

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If HR 2152 Were to Be Enacted ... Part II

In September, I posted (see here) about H.R. 2152 – the Foreign Business Bribery Prohibition Act of 2009.

Big picture, under the proposed law, any "foreign concern" (defined to mean any person other than an issuer, domestic concern or U.S. person) that violates the FCPA's anti-bribery provisions would be liable to any issuer, domestic concern or U.S. person for damages caused by the FCPA violation.

Under the proposed law, a plaintiff would need to prove that: (i) the "foreign concern" violated the FCPA's anti-bribery provisions; and (ii) the violation prevented the plaintiff from obtaining or retaining business and assisted the foreign concern in obtaining or retaining business.

In other words, if a U.S. company can prove that it lost business because a "foreign concern" gained that same business by violating the FCPA, the U.S. company could bring a lawsuit seeking damages.

Under the proposed law, the damages would be the higher of the total amount of the contract or agreement that the "foreign concern" gained in obtaining or retaining the business or the total amount of the contract or agreement that the plaintiff failed to gain. To sweeten the pot, the proposed law requires treble damages along with attorneys fees and costs.

What got me thinking about H.R. 2152 back in September was a NY Times Article titled “China Spreads Aid in Africa, With a Catch for Recipients” (see here).

What has me thinking about H.R. 2152 again is a recent article in the Washington Post titled “Afghan Minister Accused of Taking Bribe” (see here).

The article alleges that the current Afghan Minister of Mines accepted an approximate $30 million bribe around December 2007 from China Metallurgical Group Corp. in exchange for awarding a $2.9 billion contract to extract copper from one of the largest unexploited deposits in the world.

The article mentions that U.S. officials worked on the bidding process for this project and that, because of the alleged bribe payment, the Minister did not give a “fair hearing to the proposals of Western firms.”

It would thus seem that a U.S. company was competing for this project and, in fact, other media reports have suggested that Phelps Dodge bid on the project.

If so, and if H.R. 2152 were to enacted, Phelps Dodge (or any other U.S. company that bid) would have a cause of action against China Metallurgical Group Corp.

Given the damages provision of H.R. 2152, a recovery could be north of $8.7 billion … plus attorney fees and costs. Ye gods that’s a lot of money!

If H.R. 2152 ever “gets out of committee," supporters of the bill can now point to two recent examples demonstrating a need for the bill.

What I find most interesting about H.R. 2152 is that if enacted, I think it will be a "game-changer" in terms of FCPA enforcement.

Private plaintiffs will have to prove every element of an FCPA anti-bribery violation.

A private plaintiff will not carry the "big stick" that the enforcement agencies' carry (which means in the corporate context, that nearly all FCPA enforcement actions are settled by way of a non-prosecution or deferred prosecution agreement or a consent decree) and FCPA case law will surely follow.

Which means that a court will actually be called upon to construe FCPA elements and legal theories of liability.

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