S. 1700 ... A Bad Bill

[Warning – this post may cause your head to spin]

Bribery and corruption are bad.

That does not mean, however, that every attempt to curtail bribery and corruption is good.

Case in point - “The Energy Security Through Transparency Act of 2009” (S. 1700)(the "Act") introduced in the Senate on September 23, 2009 by Richard Lugar (R-IN) and co-sponsored by several other senators - both Democrats and Republicans. (see here and here).

S-1700 seeks to amend Section 13 of the Securities Exchange Act of 1934 (15 USC 78m) (“Periodical and Other Reports”) by adding a new section (m) “Disclosure of Payment by Resource Extraction Issuers.”

Under this proposed new section, no later than 270 days after enactment of the Act, the SEC shall issue final rules that would require:

• a “Resource Extraction Issuer”( a defined term which means an issuer that:(i) is required to file an annual report with the Commission; and (ii) engages in the commercial development of oil, natural gas, or minerals”)

• to include in its annual report

• “information relating to any payment”

• made by the issuer, “a subsidiary or partner” of the issuer, “or any entity under the control of the issuer”

• to a “foreign government” (a defined term which means a “foreign government, an officer or employee of a foreign government, an agent of a foreign government, a company owned by a foreign government, or a person who will provide a personal benefit to an officer of a government if that person receives a payment, as determined by the [SEC].”

• for “the purpose of the commercial development of oil, natural gas, or minerals.”

The final rules to be issued by the SEC would require that the annual report include: (i) the type and total amount of such payments made for each project” of the issuer “relating to the commercial development of oil, natural gas, or minerals;” and (ii) “the type and total amount of such payments made to each foreign government.”

Thereafter, the Act requires that “to the extent practicable, the [SEC] shall make available online, to the public, a compilation of the information required to be submitted” under the above rules.

Wow, there is a lot here, so let me try to break this down a bit – to the extent I am able.

First, this much is clear. The disclosure/reporting requirement would apply to more than just U.S. “Resource Extraction Issuers” and, in this way, is really no different than the FCPA’s books and records and internal control provisions which apply to all issuers – not just U.S. issuers.

According to one analysis (see here), of the thirty largest internationally operating oil and gas companies, twenty-seven of the companies (including those in Europe, Canada, Russia, China and Brazil) would be covered by the Act based on their issuer status.

Thus, a concern one often hears expressed with the FCPA … that it puts U.S. companies at a disadvantage … would not seem credible if made in connection with this Act. (Of course, because the FCPA – including both its anti-bribery provisions and books and records and internal control provisions – apply to more than just U.S. companies, that argument is not credible in the FCPA context either; but that is an issue for another day).

Beyond the fact that the Act will apply to more than just U.S. “Resource Extraction Issuers,” not much else about the Act is clear.

Therein lies the problem.

Not sure, if your company is a “Resource Extraction Issuer” because you are unclear what “commercial development of oil, natural gas, or minerals” means?

No problem, as the Act provides this crystal clear definition – “the term ‘commercial development of oil, natural gas, or minerals’ includes the acquisition of a license, exploration, extraction, processing, export, and other significant actions relating to oil, natural gas, or minerals, as determined by the [SEC]. “

In other words, if you are an issuer, and you engage in “significant actions relating to oil, natural gas, or minerals” you just may have some huge, new reporting / disclosure requirements imposed on you!

Still confused? Join the club.

Is selling equipment to a core resource extraction company, which is then used to explore for oil, natural gas, or minerals a “significant action relating to oil, natural gas, or minerals?” Is selling exploration software to a core resource extraction company, which is then used to explore for oil, natural gas, or minerals a “significant action relating to oil, natural gas, or minerals?”

What is a payment? That’s an easy one and the Act provides this crystal clear definition – the term payment means:

(i) a payment that is (I) made to further commercial development of oil, natural gas, or minerals; and (II) not de minimis; and

(ii) includes taxes, royalties, fees, licenses, production entitlements, bonuses, and other material benefits, as determined by the [SEC].”

Ignoring for the moment the imperfect and imprecise definition of “Resource Extraction Issuer,” it is one thing to perhaps require such issuers to disclose royalties paid to a foreign government, and if that is viewed as providing transparency and eliminating bribery and corruption (however dubious that view may be), well then perhaps the Act is a good piece of legislation.

But the Act seeks disclosure and reporting of much, much more and could conceivably require disclosure of every single dollar a “Resource Extraction Issuer” makes to, well, just about anybody in connection with the “commercial development of oil, natural gas, or minerals” if the money ultimately makes its way to a foreign government, an officer or employee of a foreign government, a company owed by a foreign government, or any person who will provide a personal benefit to an officer of a government.

What’s the knowledge requirement in the Act?

There isn’t one!

So if a “Resource Extraction Issuer” makes a payment to person who then unbeknownst to the “Resource Extraction Issuer” makes a payment to a person “who will provide a personal benefit to an officer of a government” there is a disclosure obligation.

But how the heck is the “Resource Extraction Issuer” supposed to disclose something it doesn’t know about?

Here is the real kicker though. The Act requires all payments (meeting the above definitions – if indeed you can figure out what those definitions are) to be disclosed, including perfectly legitimate and legal payments!

Here is another mind bender. Say you are one of those foreign "Resource Extraction Issuers" such as Petrobras (Brazil) that also doubles as a so-called "company owned by a foreign government." Under this Act, because the SEC already considers all Petrobras employees to be "foreign officials," such companies would presumably be required to disclose the salaries and benefits provided to all of its employees.

How silly is that?

To those who support this Act, I've got this to say - "we’ve been down this road before."

It’s called the FCPA (and the various versions of the statute before it was enacted). Years of congressional hearings were had as to this very same disclosure issue and we don’t need to repeat this exercise.

Here is some background.

The FCPA, of course, as enacted, contained (and still contains) an outright prohibition on improper payments (the anti-bribery provisions) as well as books and records and internal control provisions – but not disclosure provisions.

The original versions of what became the “FCPA” (i.e. the “Foreign Payments Disclosure Act” and other similar bills) however, started out with disclosure provisions, including provisions requiring all U.S. companies to disclose all payments over $1,000 to any foreign agent or consultant and any and all other payments made in connection with foreign government business.

As to these disclosure provisions, many people, including, most notably Senator Proxmire (D-WI - a Congressional leader on the “FCPA” issue), were concerned that the disclosure obligations were too vague to enforce and would require the disclosure of thousands of payments that were perfectly legal and legitimate.

Proxmire said during congressional hearings, “I would think they [the corporations subject to the disclosure requirements] would want some certainty. They want to know what they have to report and what they don’t have to report. They don’t want to guess and then find themselves in deep trouble because they guessed wrong.”

The final House Report (see here) on what would become the “FCPA” is even more clear. It states (when discussing the various disclosure provisions previously debated, but rejected):

"Most disclosure proposals would require U.S. corporations doing business abroad to report all foreign payments including perfectly legal payments such as for promotional purposes and for sales commissions. A disclosure scheme, unlike outright prohibition, would require U.S. corporations to contend not only with an additional bureaucratic overlay but also with massive paperwork requirements."

The words of the late Senator Proxmire and the reasoned conclusion reflected in the House Report are equally applicable here.

The Act (while however noble its intended purpose) is akin to “swatting a fly with a bazooka.”

The FCPA already criminalizes improper payments made to the “foreign government” recipients targeted in the Act to the extent those payments are made to “obtain or retain business.” Do we really now need a law that requires “Resource Extraction Issuers” to disclose ALL such payments, even perfectly legitimate and legal payments?

For the record, S-1700 has been referred to the Senate Banking, Housing, and Urban Affairs Committee.

For the record, similar legislation was introduced in Congress in 2008, but no action was taken on the bills.

For the record, this post has left me dizzy just thinking through the ramifications. I can’t imagine being a corporate counsel actually tasked with ensuring compliance with this Act.

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The FCPA's Murky "Knowledge" Element

Knowledge is one of the more difficult concepts to distill in criminal law.

The FCPA is no exception, particularly when it comes to the FCPA's "while knowing" standard set forth in the FCPA's third party payment provisions which generally prohibit otherwise improper payments to “any person, while knowing that all or a portion of such money or thing of value will be offered, given, or promised, directly or indirectly” to a foreign official. (see 78dd-1(a)(3)).

The third party payment provisions have not always included this "while knowing" standard. When first enacted in 1977 and up until 1988 (when the FCPA was amended), the third party payment provisions had a broader standard and applied if a defendant engaged in the prohibited conduct “while knowing or having reason to know” that all or a portion of such money or thing of value would be offered, given, or promised, directly or indirectly to a foreign official.

In a superb new piece titled, "The 'Knowledge' Requirement of the FCPA Anti-Bribery Provisions: Effectuating Or Frustrating Congressional Intent?," - Kenneth Winer and Gregory Husisian of Foley & Lardner (the “Authors”) conclude that "[t]he DOJ and SEC ... now interpret the knowledge requirement so broadly that they have effectively eviscerated the 1988 statutory changes thereby raising an important question: Are the DOJ and SEC frustrating the intent of Congress by ignoring the reason that Congress amended the FCPA?" (see here).

These are the type of questions we like to posed here at the FCPA Professor blog and, for the record, I am glad to see that I am not alone in questioning whether certain aspects of current FCPA enforcement frustrate or contradict Congressional intent in enacting or amending the FCPA.

The authors do a fine job of walking the reader through a concise overview of the “knowledge” element’s legislative history, particularly the 1988 House and Senate bills which sought to amend the "knowledge" element. Reviewing case law cited in the compromise conference report, the Authors conclude that the "intent of the 1988 amendments" was to "address concerns that FCPA intermediary violations could be found where there was no actual knowledge" and that even though "Congress adopted language to cover situations beyond actual knowledge, it did so in a very circumscribed fashion."

That fashion, according to the Authors, - "[o]nly in the limited circumstances where the party had something very close to actual knowledge - that is, both awareness of a 'high probability' that a corrupt payment would be made and a 'deliberate' decision to avoid gaining information in a conscious effort to avoid learning the truth - is the knowledge requirement satisfied."

According to the Authors, the DOJ and SEC, and most FCPA commentators, talk about "willful blindness" or "head in the sand" language, provide a list of red flags, and then state that "failure to follow up on red flags will be treated as knowledge, regardless of the reason why the person did not inquire."

Suppose a company is aware of a "high probability" that a corrupt payment is being made on its behalf, but that the company, perhaps because of "cost, delay, disruption or likely futility involved" in attempting to conduct an investigation, does not further. Under the "common view," such a failure to investigate is a form of culpable knowledge.

Nonsense says Winer and Husisian. They note that "[o]f course, failing to conduct sufficient due diligence or ignoring red flags can, in many circumstances, be foolish in the extreme," but that, as noted in the FCPA's legislative history and cases cited therein, such "foolishness, in and of itself, cannot constitute a finding that knowledge is present."

According to the Authors, the "net effect of this attitude is to bring the FCPA back to its original 'reason to know' standard" and the current enforcement approach utilizing this standard is nothing more than "implementing an approach that Congress specifically rejected."

Winer and Husisian close by saying:

"The SEC, DOJ, and many commentators might think it would be best if the knowledge requirement was satisfied by failure to conduct adequate due diligence or the failure to follow up on red flags (even if the defendant was not motivated by a purpose of avoiding knowledge of the corrupt payment). But that is not the policy balance that Congress struck in the 1988 amendments. The agencies should rethink their interpretation of the FCPA and enforce the knowledge requirement as Congress intended."

***

Curious as to the Author’s take on the knowledge jury instructions from the Bourke and Green trials this summer? The Bourke jury instructions - thumbs up; the Green jury instructions - thumbs down.

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Your Comments (Even if Anonymous) Are Welcome

It is always gratifying to know that people out there are reading and finding your content worthwhile.

Recently, a reader e-mailed with an informative comment, but indicated that she was hesitant to post it on the blog because she works for a company and didn't want her comment associated with the company. I told her that I allow anonymous comments and she suggested that I announce this fact.

So here is the announcement - the FCPA Professor blog allows anonymous comments. To do so, at the end of a post, click on "comment," you will then see a "comment as" drop-down box where "anonymous" is one of the options.

Why do I allow anonymous comments?

Obviously, I would prefer signed comments, however, I understand the concerns of FCPA practitioners, in-house counsel, business leaders and others when posting to a blog. After all, our topic is the FCPA - some rather serious stuff.

As a practicing lawyer, I frequented certain blogs, often felt inclined to comment on issues, but never did for fear of my comments being attributed to my firm and the clients it represents. The FCPA bar is a small bar and relationships with enforcement officials often matter just as much (at least it seemed to me) as facts and the law. For in-house counsel, their client is the company that employs them, and, in this Internet age, it is not too difficult to match people's names to their employer.

Thus, to most effectively carry out the mission statement of this blog - "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 allow anonymous comments.

There are certainly enough FCPA related topics these days to get people talking, so please feel free to start talking (even if anonymously) on this blog.

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Halliburton / KBR ... The Sequel

In February 2009, Halliburton Co., KBR Inc., and Kellogg Brown & Root LLC agreed to resolve parallel DOJ and SEC FCPA enforcement actions concerning improper payments to Nigerian officials in connection with the Bonny Island liquefied natural gas project. (see here, here, and here).

The combined $579 million in fines and penalties remains the most ever against a U.S. company for FCPA violations.

Included in the web of companies involved in the Nigeria conduct was M.W. Kellogg Company ("MWKL"), a United Kingdom joint venture 55% owned by KBR. MWKL is mentioned in the linked DOJ and SEC materials above.

It looks like Halliburton's exposure via M.W. Kellogg is not over.

Today, in a 10-Q filing (see here - p. 10), Halliburton stated as follows:

"In the United Kingdom, the Serious Fraud Office (SFO) is considering civil claims or criminal prosecution under various United Kingdom laws and appears to be focused on the actions of MWKL, among others. Violations of these laws could result in fines, restitution and confiscation of revenues, among other penalties, some of which could be subject to our indemnification obligations under the master separation agreement. Our indemnity for penalties under the master separation agreement with respect to MWKL is limited to 55% of such penalties, which is KBR’s beneficial ownership interest in MWKL. Whether the SFO pursues civil or criminal claims, and the amount of any fines, restitution, confiscation of revenues or other penalties that could be assessed would depend on, among other factors, the SFO’s findings regarding the amount, timing, nature and scope of any improper payments or other activities, whether any such payments or other activities were authorized by or made with knowledge of MWKL, the amount of revenue involved, and the level of cooperation provided to the SFO during the investigations."

It used to be that companies with FCPA exposure could get a good night's sleep after resolving DOJ and (if an issuer) SEC enforcement actions.

As this action (and others in recent years) demonstrate, the landscape has changed and "tag-a-long" FCPA-like enforcement actions or inquiries in other countries I think will become the new norm.

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Iraq ... And What Constitutes An FCPA Violation?

A couple of Iraq articles of interest to pass along.

As noted (here), yesterday in Washington D.C. the "Iraqi government, backed by the Obama administration, kick[ed] off its biggest post-Saddam investment roadshow [...] to convince American businesses to join the country's reconstruction efforts."

According to the article, "[d]ozens of Iraqi government officials, provincial governors, state investment commission authorities and others will give presentations" and "present overviews of sectors such as oil, agriculture and construction" and "investment opportunities in about 750 projects."

Bringing the topic home, there are lots of Iraqi "foreign officials" in Washington this week.

The article points out the obvious security and legal risks awaiting U.S. investors and businesses seeking to do business in Iraq.

The articles also concludes by saying that "[t]he biggest potential roadblock for most U.S. companies in Iraq is corruption" and that "American companies are generally under much closer scrutiny by U.S. regulators when it comes to overseas operations."

Although the article does not mention the FCPA specifically, readers of this blog obviously know that the comment invokes and relates to the FCPA.

So here is the question.

Corruption is high in Iraq. But what constitutes "corruption" or more to the point, what constitutes an FCPA violation when doing business or seeking business in Iraq?

Last month, when commenting on the Green's FCPA trial verdict, our friends over at the FCPA Blog (see here) said that the trial judge's jury instructions "show just how simple the FCPA's antibribery provisions really are" and noted that the only ones who seem to think that the FCPA is "complicated, technically challenging and obscure, poorly drafted and badly organized" are the lawyers who are trained to "quibble."

I agree (and to use my favorite cliche) when offering a suitcase full of cash to a government official to secure a government contract, the FCPA is straightforward and provides little room for lawyers to "quibble."

However, most FCPA issues are not as straightforward.

Given a number of reasons (the general lack of substantive FCPA case law, untested and unchallenged legal theories, etc.), there remains much about the FCPA that justifiably causes lawyers to ... well ... quibble.

So here is an exam question.

Let's say you are interested in doing business in Iraq - specifically its oil and gas sector. You learn that, per the applicable production sharing agreement or joint venture agreement being proposed, x% of employees will need to be Iraqi. Problem is, these prospective employees are not technically competent to perform the job. You are then told that it will be up to you to establish special colleges to train them.

Scratching your head?

Well, this is no academic hypothetical, this is very real world.

Iraqi's oil minister was recently quoted as saying (see here) that "Iraqis would have to make up 85 percent of the work force for the international oil companies doing business here." The minister acknowledged the fact that Iraq currently lacked the "hundreds of thousands of Iraqi engineers and technicians" needed and that "it would be up to the foreign oil companies to establish special colleges to train them."

So let's run this fact pattern through the FCPA elements assuming that the foreign oil company is an issuer or domestic concern under the FCPA.

"foreign officials" check - at least under the DOJ/SEC's untested and unchallenged assertion that employees of state-owned companies (regardless of title or rank) are foreign officials.

"thing of value" check - surely an education and obtaining technical skills is valuable.

"to obtain or retain business" check - it is a contractual term which you must agree to in order to get the business.

Sure the FCPA does have a "corrupt intent" element, but that element is often read out of the statute. For instance, many enforcement action merely set forth in conclusory fashion the corrupt intent element without providing any factual support.

The above Iraq example is not unique as most production sharing agreements or joint venture agreements in the foreign extraction industry contain similar terms or conditions requiring the U.S. company to buy "local content," fund certain community causes, and the like.

What's there to quibble about in such crystal clear examples as these?

Plenty.

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FCPA Collateral Effects and Those "Pesky" Shareholders

I previously posted (see here) that while there is little in terms of substantive FCPA case law - this much is clear - there is no private right of action under the FCPA - enforcement of the law is in the hands of the DOJ and the SEC.

That does not mean that aggrieved third parties, including a company's own shareholders, are without legal recourse should a company become subject to an FCPA enforcement action or merely disclose a potential FCPA issue.

Indeed, shareholder derivative litigation is often a collateral effect of FCPA disclosures or enforcement actions.

Case in point, the shareholder derivative complaint filed last week on behalf of Pride International, Inc. in Texas state court against certain members of its board of directors and certain of its executives officers seeking to remedy defendants' breach of fiduciary duties. (see here).

The breach?

According to the complaint, "[f]rom 2001 to 2006, Pride repeatedly violated the [FCPA] through its business operations in numerous countries." (see para. 1). "Certain current and former officers and directors of the company were aware of the violations and that the violations could, and eventually did, cause substantial harm to Pride and its shareholders, yet they knowingly failed to make a good faith effort to correct or prevent the misconduct." (see para. 1).

The complaint alleges at para 23 that "[t]he individual defendants were aware of the violations well before the company announced the FCPA Investigation to the company's shareholders and the public at large." "Nevertheless," according to the complaint, "the Individual Defendants took no action until an undisclosed employee of the company complained about the violations."

The complaint then details Pride's numerous public statements - beginning in March 2006 - regarding its potential FCPA issues and exposure. Certain of these disclosures and statements have been covered elsewhere (see here and here).

Beyond re-stating Pride's numerous public statements, the complaint is sparse on detail, including little specific factual evidence to support the allegation that the Director Defendants "knew or were reckless in not knowing of the Company's violations of the FCPA." (see para. 50).

Regardless of the complaint's ultimate fate, the Pride derivative suit is but the latest example of the collateral effects / sanctions a company will likely face when its business conduct is subject to FCPA scrutiny.

For those keeping track at home, such collateral effects / sanctions are yet another reason for companies to have effective, robust and well-communicated FCPA compliance policies and procedures which are periodically monitored and strengthened.

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FCPA ... the "Law Version" of Baseball

October is a month for baseball - the playoffs are under way and the World Series is right around the corner. Baseball aficionados are found of their statistics, and with good reason, there are a ton of baseball statistics to digest.

Well, the FCPA is quickly becoming the "law version" of baseball when it comes to statistics. Every few weeks it seems (see here for a prior post) FCPA aficionados have new statistics to digest.

The latest FCPA statistics come courtesy of Fulbright & Jaworski's 6th Annual Litigation Trends Survey (see here for download).

According to a survey of over 400 corporate counsel in the U.S. and the U.K.:

(1) "the percentage of companies that has engaged outside counsel in the past 12 months to assist with a corruption or bribery investigation (i.e., FCPA and U.K. equivalent) has nearly doubled ..." (see p. 37) and;

(2) "the incidence of due diligence for bribery or corruption relating to mergers, acquisitions or other transactions in foreign countries has more than doubled ..." (p. 38).

These statistics should come as no surprise to followers of this blog who well know that FCPA compliance is a hot topic given the current aggressive enforcement climate.

Yet, the Fulbright survey (much like the prior Deloitte survey - see here) also shows that very few companies address FCPA risks on a pro-active basis. For instance, even though Fulbright's survey found that the incidence of FCPA/bribery due diligence in M&A transactions has doubled, the number of companies engaging in such due diligence remains below 20%.

As to the "big picture" issue of whether perceived levels of corruption in a foreign country result in a company doing less business in that country, the survey shows that "only about half as many respondents as last year say their companies, at some point in the past, have decided against doing business in a country due to the perceived degree of local corruption." (see p. 38). The one exception appears to be in the manufacturing sector "where 39% have made that decision v. 27% last year."

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Potpourri

The SEC recently posted on its website (see here) a draft "Strategic Plan for Fiscal Years 2010-2015" setting forth the Commission's "mission, vision, values, and strategic goals" for the future.

Part of strategic goal 1 - to "foster and enforce compliance with the federal securities laws" - is a commitment to expand its "coordination efforts with foreign authorities, including [...] close cooperation with foreign authorities in investigations relating to [...] the Foreign Corrupt Practices Act." (see pg. 16).

While not FCPA specific, a performance metric the SEC intends to use to gauge its progress of "fostering and enforcing compliance with the federal securities laws" is the percentage of enforcement cases successfully resolved (see pg. 17). The SEC notes that "[i]n general, the SEC strives to successfully resolve as many cases as possible, but, at the same time, aims to file large, difficult, or precedent-setting cases when appropriate, even if success is not assured."

Setting FCPA precedent through the filing of a complaint, even if success is not assured, that is then subject to valid legal defenses based on the statute in a transparent, adversarial proceeding?

Wow, that's a novel concept and in contrast to the current situation where FCPA "precedent" is set (or at least viewed as being set with the SEC's encouragement) by the SEC alone through its enforcement program wherein the SEC is both a party and an adjudicator.

****

I previously posted about the "War of Words in Ecuador" (see here)- a post about Chevron's mammoth legal battle in Ecuador involving allegations of environmental contamination and how the long, messy battle now includes an FCPA component.

The posted ended by saying "this long, messy legal battle is getting more murky by the day."

As detailed in a recent story in the New York Times (see here) "in recent days the plot has thickened further."

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FCPA Training - "The First Few Minutes"

The A&E Network has a show, "The First 48," that I watch on occasion (see here). The show follows real-life homicide detectives from around the country during the "first 48 hours" of an investigation as they race against time to find the suspect.

Why is the "first 48 hours" so important? Because the chance of solving the case is apparently reduced by approximately 50% if the detectives do not get a lead in the "first 48 hours."

So what in the world does this have to do with FCPA training?

Just as the "first 48 hours" are critical to the success of a homicide investigation, the "first few minutes" are critical to the success of FCPA training.

During those critical "first few minutes" one needs to properly set the tone and engage participants on their level.

If one starts off an FCPA training session like this ... "today I will be talking about a U.S. law that makes it a crime to bribe foreign government officials to get business" - you just lost a good portion of your audience and, regardless of what you say during the rest of the training sesssion, your training session will not be as successful as it could have been.

Crime? Steve in the second row of the audience has a clean record and wouldn't hurt a fly. He coaches his son's soccer team and worships on the weekend. Joe is thinking to himself, "I have never committed a crime and I don't intend to - what does this FCPA training session have to do with me?"

Government? Melissa is in the first row of the audience. Her job function is internal audit and finance. She has absolutely no contact or communication with government officials and is thinking to herself "does this company even do business with foreign governments - what does this FCPA training session have to do with me?"

Business? Francisco, the logistics manager from outside the U.S., has been flown in for the FCPA training session. He is thinking "business - I'm not a sales and marketing guy, I just make sure our product gets into and out of the country and I occasionally help secure various licenses and permits for the company - what does this FCPA training session have to do with me?"

For reasons described in other postings on this blog, FCPA training is indeed relevant to the Steve, Melissa and Francisco's in a company.

To avoid having participants' minds wander during the "first few minutes" of FCPA training, it may be more effective to start off the training session along these lines.

"Today, I will be talking about a U.S. law that applies to all of you - regardless of whether you are in the sales and marketing department, the executive office suite, the finance and audit department, or the logistics department. This law can cover a wide range of payments the company makes, or could make, either directly or indirectly, in doing business or seeking business in foreign markets. Your understanding of this law and how it may relate to your specific job function will best ensure that the company remains compliant with this law and is able to achieve its business objectives."

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HP To Channel Partners - You MUST Complete FCPA Training

Engaging a foreign agent, representative, distributor or channel partner (collectively "channel partners") can greatly assist a company in increasing foreign sales. After all, these individuals or entities "know the landscape."

As readers of this blog well know, engaging a foreign channel partner can also be risky business under the FCPA.

In a previous post, I talked about certain minimum elements of an effective FCPA compliance program as typically set forth in DOJ non-prosecution or deferred prosecution agreements (see here).

One of those elements is the "promulgation of a compliance code, standards and procedures designed to reduce the prospect of violations of the FCPA" which "should apply to all directors, officers, and employees and, where necessary and approopriate, outside parties acting on behalf [of a company] in a foreign jurisdiction, including agents, consultants, representatives, distributors, teaming partners, and joint venture partners."

HP has apparently determined that it is necessary and appropriate for its global network of approximately 155,000 channel partners to complete HP's regulatory compliance training program or risk losing their partner status (see here).

A HP spokesperson confirmed that "HP is, in fact, working to have all of its global channel partners undergo training regarding government legal and regulatory compliance [including the FCPA] as part of establishing or renewing their Business Development Agreement" with HP.

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The FCPA As A Foreign Policy Stick

Michael Jacobson's piece (see here) about using the FCPA as perhaps a way to increase pressure on Iran has been discussed elsewhere (see here).

Below are some additional issues to consider.

The suggestion that the FCPA "gives the government extraterritorial reach over non-U.S. companies" and that "any foreign company listed on the U.S. stock exchange falls under FCPA jurisdiction" is not entirely accurate.

True, the FCPA's books and records and internal control provisions apply to non-U.S. companies which issue stock on a U.S. exchange, and true the books and records and internal control provisions contain no specific jurisdictional requirement. If a company is an issuer (including a foreign issuer) it must comply with the books and records and internal control provisions.

However, the jurisdictional reach of the anti-bribery provisions as to foreign companies is a different story.

The anti-bribery provisions were amended in 1998 to include an alternative "nationality" jurisdictional test for U.S. issuers and domestic concerns (see 78dd-1(g) and 78dd-2(i)).

As a result of these amendments, the original "use of the mails or any means or instrumentality of interstate commerce" nexus is no longer required and the reach of the anti-bribery provisions as to U.S. companies and U.S. citizens is indeed extraterritorial.

However, for a foreign issuer, the old "use of the mails or any means or instrumentality of interstate commerce" jurisdictional nexus is still applicable because the alternative jurisdictional test in 78dd-1(g) only applies to an "issuer organized under the laws of the U.S."

The other way in which a foreign company (other than an issuer) or foreign national can become subject to the FCPA anti-bribery provisions is through application of 78dd-3 (also added by the 1998 amendments). However, 78dd-3 has a "while in the territory of the U.S. [...] make use of the mails or any means or instrumentality of interstate commerce" jurisdictional requirement as well.

Big picture, for foreign companies (whether issuers or not) there is a U.S. jurisdictional requirement for the anti-bribery provisions to apply.

One sees this when looking at the Statoil enforcement action, which as Jacobson points out, is indeed the first time the U.S. held a foreign company accountable under the FCPA's criminal anti-bribery provisions - in the Statoil case for improper payments to Iranian officials to secure oil and gas rights in Iran.

However, the U.S. did not assert anti-bribery jurisdiction over Statoil merely on the basis of "its listing on the U.S. stock exchange."

Rather, Statoil was subject to the anti-bribery provisions because the improper payments were routed through a U.S. bank in New York, thus providing the U.S. the nexus needed to hold a foreign company accountable (see here for the criminal information describing the payments through the U.S. bank account and invoking the "means and instrumentality of interstate commerce" jurisdictional clause and here for the SEC cease and desist order finding violations of the anti-bribery provisions and finding that the improper payments were routed through a U.S. bank account in New York).

The point is, because of the U.S. nexus jurisdictional requirement of the anti-bribery provisions as to foreign companies, using the FCPA to hold foreign companies accountable in Iran is not as simple as Jacobson makes it seem.

Two "bigger picture" points as well.

First, I remain skeptical as to the suggestion that increased FCPA focus by U.S. enforcement authorities as to conduct in a particular country "could sufficiently deter many companies from doing business" in that particular country.

Those that adhere to this theory have, for instance, a "China issue" to address (i.e. it is common knowledge that U.S. enforcement authorities have announced several FCPA enforcement actions relating to conduct in China, yet such increased focus by the U.S. as to China business conduct has done little to deter companies from doing business in China).

Second, and more relevant to Jacobson's assertion that "even the suggestion of increased focus by the United States [...] could sufficiently deter many companies from doing business with Iran," is the following fact regarding Statoil in Iran.

In 2006 (as discussed above) Statoil paid $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.

To my knowledge, the Statoil enforcement action is the only FCPA enforcement action concerning business conduct in Iran.

The Statoil case is thus the only "test case."

And it is a unique test case at that because both the DOJ and SEC material specifically refer to the South Pars field (often times DOJ/SEC material is silent as to specific projects), as does the company's annual reports filed with the SEC.

No doubt Jacobson is right when he says that the 2006 FCPA enforcement action had a "major impact" on Statoil. As Jacobson points out, "[s]ince then, Statoil has spent millions of dollars in building a more robust internal anti corruption compliance system and putting good governance procedures into place."

You know what else Statoil has done since the 2006 enforcement action?

It has continued to do business in Iran, including in the same South Pars fields that were the subject of the 2006 FCPA enforcement action.

Here is what the company's website says about its activity in Iran (see here).

"StatoilHydro is offshore development operator for phases 6, 7 & 8 of the South Pars gas and condensate field in the Iranian sector of the Persian Gulf. We have also engaged in onshore exploration and drilling activities."

More specifically, here is what Statoil's website says about South Pars (see here).

"Phases 6, 7 & 8 of South Pars – the world’s largest gas field – are being developed by StatoilHydro as operator under an agreement signed with its local partner Petropars and the National Iranian Oil Company (NIOC) in October 2002."

For those who enjoy reading SEC's filings, Statoil's Annual Report on Form 20-F (2008) (see here) indicates the company has invested $225 million in developing South Pars.

So, what does the only Iran "test case" show?

At least from public documents, it appears to show that enforcing the FCPA against a foreign company doing business in Iran does not even deter the subject of the enforcement action from continuing to do business in Iran.

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"I Fully Expect That The Number of FCPA Prosecutions Will Continue To Rise"

Lanny Breuer delivered these words today before the National Association of Criminal Defense Lawyers.

Who is Lanny Breuer?

He is the Assistant Attorney General, Criminal Division.

When he speaks about the FCPA, one ought take notice.

Breuer's full remarks can be found here (FCPA remarks begin at pg. 5).

*****

We keep hearing about those 100+ FCPA investigations in the pipeline, but the government closed the books on its fiscal year yesterday with a relatively quite September.

The new fiscal year has ushered in change though as the DOJ unveiled a slick new website (check it out here). What logo will DOJ assign to the next FCPA release ... a calculator, a flying eagle, the scales of justice, a shield?

My bet is on the calculator ... for a FCPA books and records violation.

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"We Don't Want The Auditors Raising Any Questions on Iraq Business"

Yet another Iraqi Oil-For-Food enforcement action.

Yesterday, the DOJ and SEC announced resolution of an enforcement action against AGCO Corp. (a Georgia-based manufacturer and supplier of agricultural machinery and equipment) as well as AGCO Limited (AGCO's a wholly-owned subsidiary headquartered in the United Kingdom responsible for AGCO's business in Europe, Africa, and the Middle East)(see here, here, here, here, and here).

Big picture, AGCO acknowledged responsibility for improper payments made by its subsidiaries and agents to the former government of Iraq in order to obtain contracts with the Iraqi Ministry of Agriculture under the United Nations Oil-For-Food program.

DOJ filed a criminal information against AGCO Limited charging one count of conspiracy to commit wire fraud and to violate the FCPA's books and records provisions.

According to the DOJ, AGCO Limited paid approximately $550,000 to the former government of Iraq to secure three contracts. DOJ and AGCO entered into a three-year deferred prosecution agreement under which DOJ will defer prosecution upon, among other things, AGCO's payment of a $1.6 million penalty. According to the DOJ, the basis for the deferred prosecution agreement was, among other things, AGCO's cooperation in the DOJ's investigation, its implementation of remedial measures, and its settlement with the SEC (see below).

Why no substantive FCPA anti-bribery charges in this case and other Iraqi Oil-For-Food cases (Novo Nordisk, Fiat, AB Volvo, etc.)? The anti-bribery provisions apply to payments to "foreign officials," not foreign governments. Thus, in this and the other cases, conspiracy to commit wire fraud and to violate the FCPA books and records provisions were charged.

Because AGCO is an issuer, the SEC also played a role in the enforcement action. The SEC filed a settled civil complaint charging AGCO with violating the FCPA's books and records and internal control provisions.

According to the SEC, certain AGCO subsidiaries made - through a Jordanian agent - approximately $5.9 million in kickback payments to Iraq in the form of "after-sales service fees" to secure contracts worth approximately $14 million. These payments were disguised or improperly recorded in the subsidiaries' books and records which were consolidated with AGCO's for SEC filing purposes. According to the SEC, "AGCO knew or was reckless in not knowing that kickbacks were paid in connection with its subsidiaries' transactions."

The SEC ordered AGCO to pay $18.3 million in combined disgorgement, interest, and penalties.

In a previous post (see here), it was noted that FCPA compliance is a task that not just company lawyers need to be concerned with, but rather a task that internal audit and finance should also be concerned with and actively involved in as well. It was noted that internal audit and finance personnel must be specifically trained to approach their specific job functions with "FCPA goggles" on.

Reading the SEC complaint against AGCO, it is clear that various AGCO personnel could have used a pair of "FCPA goggles" as the complaint is an indictment of the entire company's control function.

In para 23, the SEC charges, among other things, that:

the "accrual account [where the kickback payments were recorded] was created by AGCO Ltd.'s marketing staff with virtually no oversight from AGCO Ltd.s' finance department;"

"no one questioned the existence of the dual accounts;"

"no one questioned why the [accrual account] contained approximately ten percent of the contract value despite the fact that there was no contract in place requiring that such ten percent be paid to the ministry or anyone else;"

"when the finance department authorized payments from the [accrual account], it did not ask for or receive any proof of service to warrant the payments;" and

an employee cautioned the business manager for Iraq and his supervisor that "we don't want the auditors raising any questions on Iraq Business!"

Further, in para 25, the SEC charges, among other things, that:

"Sales and marketing personnel were able to enter into contracts without review from the legal or finance departments;"

"an accounting employee described the Finance Department employees as 'blind loaders' who input information into AGCO's books without any adequate oversight role;" and

"marketing personnel were able to create accrual accounts [...] without any oversight and caused accounts to be created and payments to be made without proper documentation."

In para. 26, the SEC charges, among other things, that:

"AGCO Ltd.'s structure at the time allocated inappropriate accounting and finance responsibilities to the marketing department;" and

"turnover in the marketing department [...] was high and employees were forced to shoulder a great deal of the accounting burden."

AGCO's management and legal department did not fare much better.

In para. 27, the SEC charges, among other things, that:

"AGCO did not conduct any due diligence on the [Jordanian] agent or require that the agent undergo FCPA training;" and

the "agent's contract with AGCO did not accurately explain the agent's services and payments, and lacked any FCPA language."

What would the results look like if your company or your client's company was "put under the internal controls microscope" in an FCPA enforcement action?

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