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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Another FCPA Speech

Last week it was the Annual Pharmaceutical Regulatory and Compliance Congress and Best Practices Forum (see here), this week the audience for Assistant Attorney General Lanny Breuer was ACI's National Forum on the FCPA

The ACI conference (see here) is a signature event for the FCPA bar and FCPA compliance community. Breuer participated in past ACI events as a private FCPA practitioner at Covington & Burling and yesterday he gave the keynote luncheon address.

The link to the speech on the DOJ website is inactive, but the speech is embedded in this piece from the WSJ Law Blog (see here).

The speech covers a wide range of topics and will be of interest to all FCPA practitioners and others interested in following FCPA developments.

Here are a few highlights:

On individual prosecutions - "...we tried more individuals for FCPA violations than in any prior year. And we indicted more individuals than ever before. That is no accident. In fact, prosecution of individuals is a cornerstone of our enforcement strategy. [...] Put simply, the prospect of significant prison sentences for individuals should make clear to every corporate executive, every board member, and every sales agent that we will seek to hold you personally accountable for FCPA violations."

On how the DOJ learns of FCPA issues - "Although many of these cases come to us through voluntary disclosures, which we certainly encourage and will appropriately reward, I want to be clear: the majority of our cases do not come from voluntary disclosures. They are the result of pro-active investigations, whistle blower tips, newspaper stories, referrals from our law enforcement counterparts in foreign countries, and our Embassy personnel abroad, among other sources."

On resolving corporate FCPA matters - "...despite rumors to the contrary, we do also decline prosecution in appropriate cases. [...] With regard to corporate cases, the Department will continue to pursue guilty pleas or, if necessary, indictments against corporations - when the criminal conduct is egregious, pervasive and systemic, or when the corporation fails to implement compliance reforms, changes to its corporate culture, and undertake other measures designed to prevent a recurrence of the criminal conduct. We also recognize that there will be situations in which guilty pleas or criminal charges are not appropriate. Now, we may have good-faith disagreements about when those circumstances present themselves, but we do not take our task lightly. We are mindful of direct impact on the company itself, as well as the numerous collateral consequences that often flow from these charging decisions. We are sophisticated attorneys, and we understand the challenges and complexities involved in doing business around the globe."

On corporate monitors - "In appropriate cases, we 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."

On whether to make a voluntary disclosure - this is a "sometimes difficult question" [...] a question I grappled with as a defense lawyer. I strongly urge any corporation that discovers an FCPA violation to seriously consider making a voluntary disclosure and always to cooperate with the Department. The Sentencing Guidelines and the Principles of Federal Prosecution of Business Organizations obviously encourage such conduct, and the Department has repeatedly stated that a company will receive meaningful credit for that disclosure and that cooperation. [...] I can assure you that the Department's commitment to meaningfully reward voluntary disclosures and full and complete cooperation will continue to be honored in both letter and spirit. I am committed to no less."

On the road ahead - "In addition to holding culpable individuals accountable and meaningfully rewarding voluntary disclosures and genuine cooperation, we will continue to focus our attention on areas and on industries where we can have the biggest impact in reducing foreign corruption." Breuer then discusses the pharma industry in particular.

On asset forfeiture and recovery - "We will seek forfeiture in all appropriate cases going forward. [...] We will be taking advantage of the expertise of both the Fraud Section and our Asset Forfeiture and Money Laundering Section to forfeit and recover the proceeds of foreign corruption offenses." Breuer's comments on this topic largely shadow the recent comments of Attorney General Holder (see here).

On enhanced resources - "As I imagine most of you have heard, in 2007 the FBI created a squad with agents dedicated to investigating potential FCPA violations. The squad has been growing in size and in expertise over the past two years. In addition, we have begun discussions with the Internal Revenue Service's Criminal Investigation Division about partnering with us on FCPA cases around the country. Finally, we are now pursuing strategic partnerships with certain U.S. Attorney's Offices throughout the United States where there are a concentration of FCPA investigations."

On Mark Mendelsohn's rumored departure as DOJ Deputy Chief - FCPA - "... as we look to the future, we will be building on the extraordinary efforts and success of our Deputy Chief over the FCPA area, my friend Mark Mendelsohn, who is beginning to explore options for the next phase of his career. Mark has been an exceptional public servant and a visionary steward of the FCPA Program. Regardless of where Mark chooses to go, we will miss him greatly."

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Last week, I questioned Breuer's characterization of the Jefferson verdict in his pharma address (see here). In that address he said as follows:

"In the past few months, we have the completed the trials of the Greens in California, of Mr. Bourke in New York and of former Congressman William Jefferson in Virginia. In each of these cases, individuals were found guilty of FCPA violations and face jail time."

Yesterday, Breuer correctly noted, as to the Jefferson case, as follows: Jefferson "was convicted of a conspiracy of which one object was to violate the FCPA by bribing former high-ranking Nigerian government officials."

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Of Course It's Because of the Oil

"Bribe takers" get a free pass under the FCPA as the statute only applies to "bribe givers."

However, in 2004, President Bush signed Proclamation 7750 "To Suspend Entry As Immigrants or Nonimmigrants of Persons Engaged In or Benefiting From Corruption" (see here). The Proclamation states:

"...that it is in the interests of the United States to take action to restrict the international travel and to suspend the entry into the United States, as immigrants or nonimmigrants, of certain persons who have committed, participated in, or are beneficiaries of corruption in the performance of public functions where that corruption has serious adverse effects on international activity of U.S. businesses, U.S. foreign assistance goals, the security of the United States against transnational crime and terrorism, or the stability of democratic institutions and nations."

Section 2 of the Proclamation says that its prohibitions "shall not apply with respect to any person otherwise covered [...] where entry of the person into the United States would not be contrary to the interests of the United States."

So what happens when the Forest and Agriculture Minister of Equatorial Guinea and the son of Equatorial Guinea's president shows up at the U.S. "doorstep" on his way to his $35 million Malibu estate?

To find out, here is the article from today's NY Times.

Short answer, he is let in. Despite the fact that federal law enforcement officials believe that "most if not all" of his wealth came from corruption related to oil and gas reserves in his home country. Despite the fact that the DOJ believes that he "may be receiving bribes or extortion payments" from oil companies operating in the country.

Why is he allowed in the U.S. in seeming contradiction to Proclamation 7750?

Well, at least according to the former U.S. ambassador to Equatorial Guinea it is "of course because of oil."

A former State Department official says that the State Department (which is responsible for enforcing the proclamation) "seem[s] to lack the backbone to use this prohibition."

******

Interesting side note - in contrast to the FCPA's "foreign official" definition, Proclamation 7750 applies to "public officials or former public officials."

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Jefferson Sentenced / When a Jury Verdict is Relegated to a Footnote

[Please scroll down, there are three posts today]

Today, former Congressman William Jefferson was sentenced to 13 years in federal prison. He was convicted in early August of a variety of charges (solicitation of bribes, honest services wire fraud, money laundering, racketeering, and conspiracy)(see here for the DOJ release).

However, he was acquitted on the substantive FCPA antibribery charge.

As mentioned above, Jefferson was convicted of conspiracy, but what conspiracy was unclear as the indictment charged conspiracy to solicit bribes, to commit honest services wire fraud, and to violate the FCPA.

Problem is, the jury was instructed that to convict it only needed to find Jefferson guilty on two out of three of those counts.

In announcing the jury verdict, the court did not specify which counts the jury agreed on ... the jury may have concluded that Jefferson conspired to violate the FCPA or it may have not. (See here for my prior post). See here for what others have said.

This uncertainty / ambiguity, it would seem, matters little to the DOJ as its sentencing memorandum in the Jefferson case says that "... as egregious and illegal as [Jefferson's] bribe solicitations were, Congressman Jefferson further compounded his criminal culpability by conspiring with others to pay a bribe to the then-sitting Vice President of Nigeria." (p. 6).

Given the above, this statement would seem to be a bit of a stretch based on the jury's verdict.

Sure, the DOJ sentencing memorandum mentions the jury's verdict on this issue, but it relegates the verdict to a mere footnote. Here is the footnote in its entirety:

"The government recognizes that the jury returned a verdict of “not guilty” to the charge contained in Count 11 of the indictment, a substantive violation of the Foreign Corrupt Practices Act. The government believes that the jury found Congressman Jefferson not guilty on Count 11, at least in part, because he ultimately failed to deliver the $100,000.00 in cash to the Nigerian Vice President before the Vice President departed the United States on July 31, 2005. However, the evidence fully supports the proposition that the jury, nevertheless, found that the defendant conspired to bribe the Vice President of Nigeria, an object of the conspiracy charged in Count 1, a count on which the jury returned a guilty verdict. Such a verdict would not require proof of the actual delivery of the cash to the Vice President (front end) or actual payment of the percentage of the proceeds of the joint venture (back end). The government believes that the evidence supports such a split finding by the jury as to Counts 1 and 11. Although delivery of the cash to the Vice President of Nigeria was not a legal pre-requisite to finding Congressman Jefferson guilty of Count 11, it offers a compelling explanation for the jury’s split verdict. Finally, the government recognizes that such a split verdict can never be completely confirmed because the conspiracy charged in Count 1 contained three objects, one of them being the charge related to the bribe of the Vice President of Nigeria. The verdict form completed by the jury on August 5, 2009 did not require the jury to delineate which, if not all, of the objects charged in the conspiracy in Count 1 were found to have been proved, only that at least one of the objects was proven by the government beyond a reasonable doubt."

As if relegating a jury verdict to a footnote is not unsettling enough, yesterday Assistant Attorney General Breuer in his speech (see here for the post) was so bold as to say this:

"In the past few months, we have the completed the trials of the Greens in California, of Mr. Bourke in New York and of former Congressman William Jefferson in Virginia. In each of these cases, individuals were found guilty of FCPA violations and face jail time."

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Lighthouses and Buoys

Every so often, things sort of appear out of "left field."

This is not the only blog which covers the FCPA and several law firms keep rolling statistics as to FCPA enforcement actions, indictments, pleas, etc.

Even so, has anyone ever heard of Charles Paul Edward Jumet or Ports Engineering Consultants Corporation?

Forget the indictment (that was apparently filed on November 10th - see here), Jumet pleaded guilty today to conspiring to violate the FCPA (among other charges). See here for the DOJ release.

Get ready to a make flow chart, because the facts are rather confusing.

The big picture, according to the indictment and plea, is that Jumet and others conspired to "pay money secretly to Panamanian government officials in return for awarding Ports Engineering Consultants Corporation ("PECC" - a company organized under the laws of Panama with an office in Virginia) contracts to maintain lighthouses and buoys along Panama's waterways..." (see indictment p. 4). Jumet, a U.S. citizen, was the VP of PECC and later its President.

The "foreign officials" were: Government Official A (the Administrator of Panama's National Maritime Ports Authority) ("APN"); Government Official B (a Deputy Administrator and Administrator of APN); and Government Official C ("a very high-ranking executive official of the Republic of Panama").

According to the indictment, Jumet and others designated "Warmspell Holding Company" and "Soderville Corporation" as shareholders of PECC as a means of giving corrupt payments to the officials in the form of "dividend" payments or "bearer" shares.

According to indictment, Soderville "belonged to Government Official A" and Warmspell "corporate officers were relatives of Government Official B."

According to the DOJ release, "[a]s part of his plea agreement, Jumet has agreed to cooperate with the Department of Justice in its ongoing investigation."

Also out of "left-field," since when did the Department of Homeland Security, Immigration and Customs Enforcement begin to enforce the FCPA?

Para. 3 of the indictment says that "[i]nvestigation of violations of the FCPA ... fall within the jurisdiction of both the [FBI] and the United States Department of Homeland Security, Immigration and Customs Enforcement."

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An FCPA Triangle

First it was the company - Willsbros Group Inc. (see here).

Then, it was the company's employees - Jim Bob Brown (see here) and Jason Steph (see here).

Finally, it is the company's consultant - Paul Novak (see here).

An FCPA triangle of sorts.

Don't hold your breath waiting for an FCPA square because, as has been noted in previous posts, the final piece of the puzzle ... the "foreign official" will not be happening anytime soon as the FCPA only applies to the "briber-giver" not the "bribe-taker."

As noted in the DOJ release, Novak (a former consultant for Willbros International Inc. - a subsidiary of Willbros Group Inc.) pleaded guilty to one count of conspiracy to violate the FCPA and one substantive count of violating the FCPA in connection with payments to Nigerian "foreign officials."

Assistant Attorney General Breuer (the blog's "person of the week" given his frequent mention here in the last few days) had this to say:

"The use of intermediaries to pay bribes will not escape prosecution under the FCPA. The Department will continue to hold accountable all the players in an FCPA scheme - from the companies and their executives who hatch the scheme, to the consultant they retain to carry it out."

Of course, there still must be jurisdiction over the consultant, but this was not a problem in the Novak matter as he is a U.S. citizen and thus subject both to territorial jurisdiction (i.e. U.S. nexus - see 78dd-2(a)) or nationality jurisdiction (see 78dd-2(i)).

This isn't the first time the DOJ has gone after consultants or agents. In March 2009, the DOJ unsealed indictments against U.K. citizens Jeffrey Tesler and Wojciech Chodan for their alleged roles in the KBR/Halliburton Nigeria bribery scheme. (see here for the DOJ release, here for the indictment).

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A Few Questions From the Back Row

Today, Assistant Attorney General Lanny Breuer gave a keynote address to the 10th Annual Pharmaceutical Regulatory and Compliance Congress and Best Practices Forum (see here for his address).

In addition, to talking about the unique FCPA compliance risks facing the pharmaceutical industry, Breuer also discussed general FCPA topics such as compliance and voluntary disclosure. Whether you are in the pharma industry or not, you probably want to take a look at what he had to say.

Here is what Breuer had to say about the "foreign official" element of an FCPA anti-bribery violation.

"...who exactly qualifies as a 'foreign official' in the context of a public health system, and what constitutes a corrupt offer or payment that violates the FCPA? Of course, the answers to those questions depend on the facts and circumstances of every case, and I can't give you binding guidance from the podium today."

Breuer also said:

"...consider the possible range of 'foreign officials' who are covered by the FCPA: Some are obvious, like health ministry and customs officials of other countries. But some others may not be, such as the doctors, pharmacists, lab technicians and other health professionals who are employed by state-owned facilities. Indeed, it is entirely possible, under certain circumstances and in certain countries, that nearly every aspect of the approval, manufacture, import, export, pricing, sale and marketing of a drug product in a foreign country will involve a 'foreign official' within the meaning of the FCPA."

If I had attended the address, I would have raised my hand and asked these questions (perhaps someone did).

Why can't the DOJ give binding guidance (or even just guidance) on the meaning of the "foreign official" element?"

You say that "doctors, pharmacists, lab technicians and other health professionals who are employed by state-owned facilities" are included in the range of "foreign officials who are covered by the FCPA." However, isn't that merely the DOJ's interpretation of the statute, and an untested and unchallenged interpretation at that? Before companies are subject to an FCPA enforcement action based on this theory, shouldn't there at least be some judicial acceptance of this theory? If you believe there has been, can you please provide the case cites? Is DOJ willing to make public its legal analysis and rationale for this theory?

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In the News

Some interesting news articles to pass along.

The first piece is from today's New York Times and is titled "Blackwater Said to Pursue Bribes to Iraq After 17 Died" (see here).

The article suggests, based on former company sources, that Blackwater (and its executives) could ... well ... be in some murky FCPA water in connection with alleged secret payments to Iraqi officials.

According to former company officials, the payments were intended to silence the officials' "criticism and buy their support after a September 2007 episode in which Blackwater security guards fatally shot 17 Iraqi civilians" an event which generated much media coverage and congressional interest (see here among other sources).

The specific recipients of the payments? According to sources, officials in the Iraqi Interior Ministry who demanded that Blackwater secure an operating license after the September 2007 incident in order to continue doing business in the country.

The FCPA anti-bribery provisions contain an obtain or retain business element.

You ask, does making payments to foreign officials to secure a license satisfy that important element?

This general issue was addressed by the Fifth Circuit in U.S. v. Kay, 359 F.3d 738 (5th Cir. 2004) (one of the few instances in which a court has rendered a substantive FCPA decision).

The issue in Kay was whether payments to Haitian officials for the purpose of avoiding custom duties and sales taxes in Haiti could satisfy the FCPA's obtain or retain business element.

Concluding that the obtain or retain business element was vague, the court analyzed the FCPA's legislative history and concluded that such payments (even though they do not lead to specific government contracts) could nevertheless provide an unfair advantage to the payor over competitors and thereby assist the payor in obtaining and retaining business.

The court did not hold that ALL such payments could satisfy the FCPA's obtain or retain business element, only that such payments COULD satisfy this key element if, for instance (as in the Kay case), the payments were intended to lower the company's cost of doing business in the foreign country.

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. Because these enforcement actions have not been contested, it remains an open question as to whether all such payments can indeed satisfy the FCPA's obtain or retain business element and under what circumstances.

Blackwater (now called Xe Services), through a spokeswomen, dismissed the allegations as baseless.

Nevertheless, some juicy stuff here - the U.S. military's then prime security contractor in Iraq (and a company which did classified work for the CIA) making bribe payments in a war zone.

One wonders who knew what within official Washington.

Will this alleged conduct be pursued by the DOJ or put on the backshelf due to national security / foreign policy issues?

To my knowledge, this angle of Blackwater's activities in Iraq has never been disclosed and, if so, the piece would seem to represent a dandy piece of investigative journalism.

The second article, titled "A Morgan Stanley Star Falls In China," is from Reuters (see here).


The piece examines the rise and fall of Garth Peterson, a U.S. citizen, who joined Morgan Stanley's Hong Kong office earlier this decade and quickly rose through the ranks of V.P., executive director, and ultimately managing director of Morgan Stanley's real estate investment operation in China.

Peterson was fired by Morgan Stanley last December over concerns that he may have violated the FCPA.

Morgan Stanley disclosed the results of its internal investigation into Peterson's conduct to both the DOJ and the SEC. Here is the company's February 2009 8-K filing.

What did Peterson do that may have violated the FCPA?

The article suggests that Peterson's relationship with Shanghai Yongye Group (a real estate developer) and its former Chairman, Wu Yonghua, and his daughter, Linda Wu, are at issue. Also relevant, it appears, is Shanghai Dragon Investment Co.

I hate to be the one always bringing up this issue, but if employees of Shanghai Yongye Group and Shanghai Dragon Investment Co., are somehow being considered "foreign officials" under the FCPA, I would sure love to see that legal analysis.

Anyway, back to the story.

The article is an interesting read on a number of fronts and provides an insight into one company's handling of an FCPA issue.

First, the article notes that Morgan Stanley sent Peterson to an FCPA workshop. Given that this occured in 2008, it is debatable whether this was "too little too late."

Second, comes an internal review, which from the article, appears to have been done in the ordinary course of business. The ordinary internal review uncovers some extraordinary issues.

Next, the company initiates an internal investigation to look into the suspicious issues. And what an internal investigation it was. According to the article, more than 7.4 million pages of e-mails were reviewed. According to the article, the investigation "found that in a discrete number of instances, investment assets were used for improper purposes not authorized by senior management" an occurrence which would seem to violate, at the very least, the FCPA's internal control provisions which require, among other things, that an issuer like Morgan Stanley devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that: (i) transactions are executed in accordance with management's general or specific authorization; and (ii) access to assets is permitted only in accordance with management's general or specific authorization.

Next, comes the corrective measures, in this case, Peterson was fired.

Next, comes the disclosure (see above).

The article closes by saying that even if found guilty Peterson is "unlikely to be jailed as he and the firm are expected to pay damages and fees, possibly through a deferred prosecution agreement."

Spot-on with the company likely entering into a deferred prosecution agreement.

However, the authors (and their sources) apparently have never heard the names of Frederic Bourke, Albert Jack Stanley, Steven Ott, Roger Michael Young (and many others) who are currently living in a federal prison (or waiting to check in) for violating or conspiring to violate the FCPA.

According to article, Peterson currently lives in Singapore.

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366 Days

After a nearly decade long investigation which spanned the globe, dismissal of FCPA substantive charges on statute of limitations grounds, reinstatement of the FCPA substantive charges, a superseding indictment which then dropped the FCPA substantive charges in exchange for "only" conspiracy to violate the FCPA, and a six week jury trial this past summer, the DOJ finally extracted its "pound of flesh" from Frederic Bourke.

As has been widely reported, this afternoon Judge Shira Scheindin (S.D.N.Y.) sentenced Bourke to a year and a day in federal prison (followed by three years probation) and ordered him to pay $1 million fine. The DOJ sought a 10 year prison sentence. The DOJ release announcing the sentence is presumably forthcoming.

Bourke who? What's this about?

To those of you wading into the details of this case for the first time or only recently, you will be well served by reading Andrew Longstreth's superb piece which recently appeared in the American Lawyer (see here).

Bourke was convicted in July by a jury for conspiring to pay bribes to Azerbaijan officials. The DOJ news release announcing the conviction (see here) called it a "massive [bribery] scheme."

What was Bourke guilty of? According to the DOJ release:

"Evidence presented at trial established that Bourke was a knowing participant in a scheme to bribe senior government officials in Azerbaijan with several hundred million dollars in shares of stock, cash, and other gifts. According to evidence presented at court, the bribes were meant to ensure that those officials would privatize the State Oil Company of the Azerbaijan Republic (SOCAR) in a rigged auction that only Bourke, fugitive Czech investor Viktor Kozeny and members of their investment consortium could win, to their massive profit."

Bourke lawyers (and many other observers) feel that Bourke was simply guilty of being negligent and not asking enough questions before making a foreign investment, an investment that was also made by former U.S. Senate Majority Leader George Mitchell and Columbia University (among others). An investment that resulted in Bourke reportedly losing $8 million.

The Bourke case is arguably the most complex and convoluted case in the history of the FCPA.

Yet it is not over as Bourke's lawyers have promised an appeal.

Under our legal system, if a grand jury indicts you, a jury convicts you, and a judge sentences you ... well, that is just sometimes "how the cookie crumbles."

However, the Bourke case and his sentence does not exactly leave one with "warm, fuzzy feelings."

In fact, Judge Scheindin (i.e. the sentencing judge and the judge who denied Bourke's post-verdict motions) is being widely reported as saying this at today's sentencing hearing:

“After years of supervising this case, it’s still not entirely clear to me whether Mr. Bourke is a victim or a crook or a little bit of both.”

That seems an appropriate end to this chapter of the Bourke saga.

******

I haven't read every pleading in this case, every motion filed, nor obviously heard every word of evidence the convicting jury did. There is certainly enough in this case for a law school to one day offer an LLM in the Bourke case!

Nonetheless, it is a seriously open question in my mind as to whether this case was an appropriate exercise of prosecutorial discretion and whether justice has indeed been served with Bourke's sentence.

So what do you think? What are your thoughts on the Bourke case and his sentence?

I would like to do a post on reader commentary in the coming days, so please do contact me if you are so inclined.

For starters, Brian Whisler of Baker & McKenzie contacted me. He is what Brian (a former federal prosecutor) had to say:

"In federal parlance, 12 months and one day translates into 10 months due to some quirky Bureau of Prisons calculus. This sentence is also less than the 2 years that the US Probation Office represented as the appropriate guideline sentence. I expected that the district judge would impose a sentence less than the two years because (1) Bourke lost $8 million in a bribery scheme that did not meet its objective; (2) Bourke has no criminal history and does not represent a future danger, economic or otherwise. This bribery case, while certainly important to DOJ in its dedicated effort to eradicate corruption globally, stands in sharp contrast to the likes of Madoff and others whose harm to others is readily apparent."

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Holder to Corrupt Foreign Officials - We Are Coming After Your Money

This weekend, in Doha, Qatar, Attorney General Eric Holder spoke at the Sixth Global Forum on Combating Corruption and Safeguarding Integrity (see here for the full text of his speech).

The forum was a meeting of nations which have signed on to the United Nations Convention Against Corruption (see here).

One of the three "critical steps" Holder spoke of which all member nations should work together to ensure is that "corrupt officials do not retain the illicit proceeds of their corruption."

Calling such asset recovery a "global imperative," Holder announced a "redoubled commitment on behalf of the United States Department of Justice to recover" funds obtained by foreign officials through bribery.

As most readers of this blog know, the FCPA only applies to "bribe-givers" and not "bribe-takers."

Notwithstanding the FCPA's limitation, in recent years the DOJ has attempted to recover bribe proceeds.

Most notably, in January 2009, in the aftermath of the Siemens enforcement action, the DOJ filed a forfeiture action against bank accounts located in Singapore in the names of Zulfikar Ali, Fazel Selim, and ZASZ Trading and Consulting Pte Ltd. ("ZASZ") (see here).

According to the DOJ's complaint (see here), these accounts were used by Siemens and another company to bribe foreign officials in violation of the FCPA, specifically Arafat Rahman ("Koko"), the son of former Bangladeshi Prime Minister Khaleda Zia. The DOJ alleges that the illicit funds in these accounts flowed through U.S. financial institutions thereby subjecting them to U.S. jurisdiction.

In announcing the forfeiture action, a DOJ official said that the action "shows the lengths to which U.S. law enforcement will go to recover the proceeds of foreign corruption ..." and that the DOJ will not only prosecute companies and executives who violate the FCPA, but will also use forfeiture laws "to recapture the illicit facilitating payments often used in such schemes."

As to other means of potentially punishing the "bribe takers," the FCPA blog recently posted on Presidential Proclamation 7750 (Jan. 2004) (see here).

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The Pipeline

It's been a slow last few months in FCPA enforcement land.

Excluding individual pleas or enforcement actions, the last FCPA enforcement action against a corporation (non-Iraqi Oil for Food) was way back in July against Control Components, Inc. (see here).

We keep hearing about those 100+ FCPA investigations in the pipeline, so let's take a look at a few of those cases. In fact, its been a very active week on the FCPA disclosure front as the following companies' SEC filings evidence: RAE Systems, Inc.; Global Crossing Limited; Maxwell Technologies, Inc; and Innospec Inc.

Set forth below are the relevant disclosures.

All sorts of stuff in these disclosures which evidence that no industry is immune from FCPA scrutiny and no one country is FCPA risk free.

The companies involved are in the following industries: (i) a developer and manufacturer of rapidly deployable chemical and radiation detection monitors and multi-sensor networks; (ii) telecommunications solutions; (iii) energy storage and power delivery solutions; and (iv) specialty chemicals.

The conduct at issue took place in the following countries: China, Latin American countries, and Iraq.

The conduct at issue involved/arose because of M&A activity and use of foreign sales agents.

And for good measure one disclosure references a "tag-along" investigation in the U.K.

RAE Systems, Inc. (see here)

"The company is actively engaged in discussions with the Department of Justice and the Securities and Exchange Commission to settle the outstanding joint investigation into the company's alleged violations of the Foreign Corrupt Practices Act (FCPA). Although no assurances can be given as to whether the matter will settle or the amount of any settlement, the company booked an accrual of $3.5 million in the third quarter 2009 relating to this potential settlement."

***

"During the quarter, to ensure our long-term success, we furthered initiatives to run the company more efficiently, particularly in China," said Robert Chen, president and CEO of RAE Systems. "Globally, we are prioritizing cost management, business controls and cash generation. For the nine months ended September 30, 2009, we increased our cash balance by $1.3 million to $16.2 million. In China, we installed a new management team; instituted mandatory, ongoing, FCPA compliance training; and began consolidating certain operations."

Global Crossing Limited (see here p. 24, 40)

"We are subject to the Foreign Corrupt Practices Act (“FCPA”), which generally prohibits companies and their intermediaries from making improper payments to foreign officials for the purpose of obtaining or keeping business and/or other benefits. Although we have policies and procedures designed to ensure that the Company, its employees and agents comply with the FCPA, there is no assurance that such policies or procedures will work effectively all of the time or protect us against liability under the FCPA for actions taken by our agents, employees and intermediaries with respect to our business or any businesses that we acquire. We operate in a number of jurisdictions that pose a high risk of potential FCPA violations. In May 2007, we acquired Impsat, which was also subject to the FCPA prior to the acquisition. As described in “Additional Information Regarding Impsat” in Item 4 below, the facts developed in our review of certain payments made by Impsat employees to government officials and foreign government proceedings concerning Impsat personnel show that: first, although Impsat had policies in place prior to the May 9, 2007 acquisition relating to FCPA compliance and contracting with third-party agents, those policies were not implemented; second, Impsat’s documentation relating to third-party agents and certain government contracts was not sufficient; and third, the corporate environment at Impsat did not reflect a sufficient focus by senior management on promotion of, and compliance by the Company with, these policies. We conducted a review of certain agents, government contracts, and potential unauthorized payments in Latin American countries. That review is now substantially complete. We have also brought these matters to the attention of government authorities in the U.S, including the Securities and Exchange Commission, which has commenced a preliminary inquiry into the matter. We are cooperating with that inquiry which may result in legal action. At this point we are unable to predict the duration, scope or result of that inquiry. Failure to comply with the FCPA and other laws governing the conduct of business with government entities (including local laws) could lead to criminal and civil penalties and other remedial measures (including further changes or enhancements to our procedures, policies, and controls and potential personnel changes and/or disciplinary actions), any of which could have an adverse impact on our business, financial condition, results of operations and liquidity. Any investigation of any potential violations of the FCPA or other anti-corruption laws by U.S. or foreign authorities could have an adverse impact on our business, financial condition and results of operations. Furthermore, any remediation measures we take in response to such potential or alleged violations by Impsat or other acquired businesses of the FCPA or other anti-corruption laws, including any necessary changes or enhancements to our procedures, policies, and controls and potential personnel changes and/or disciplinary actions, may adversely impact our business, financial condition and results of operations." (see additional information on pg. 39 of the filing).

Maxwell Technologies, Inc. (see here)

"As reported previously, the company is conducting an internal review of payments made to an independent sales agent in China in connection with sales of high voltage capacitor products produced by Maxwell’s Swiss subsidiary. The company believes that the amount of the payments was immaterial in all periods involved. However, because the company’s international operations make it subject to the U.S. Foreign Corrupt Practices Act (FCPA), management is conducting further review to determine how these payments should be treated for FCPA purposes. The internal review has not been completed, and the company is voluntarily sharing information related to the review with the Securities and Exchange Commission and Department of Justice and has provided documents as requested by the SEC in connection with its review of this matter."

Innospec Inc. (see here)

"On February 7, 2006, the Securities and Exchange Commission (“SEC”) notified the Company that it had commenced an investigation to determine whether any violations of law had occurred in connection with certain transactions conducted by or involving the Company, including those conducted by its wholly owned indirect Swiss subsidiary, Alcor Chemie Vertriebs GmbH (“Alcor”), under the United Nations Oil for Food Program (“OFFP”) between June 1, 1999 and December 31, 2003. As part of its investigation, the SEC issued a subpoena requiring the production of certain documents, including documents relating to these transactions, by the Company and Alcor. Upon receipt of the SEC’s notification and initial subpoena, the Company undertook a review of its participation in the OFFP.

On October 10, 2007 and November 1, 2007, the SEC served two additional subpoenas on the Company. These additional subpoenas required the production of documents relating both to the OFFP, and also to transactions conducted by the Company or its subsidiaries with state owned or state controlled entities between June 1, 1999 and the date of such subpoenas, concerning the use of foreign agents and the possibility of extra-contractual payments to secure business with foreign governmental entities in the context of the U.S. Foreign Corrupt Practices Act (“FCPA”) and other laws. In a coordinated investigation, the Company was also notified by the U.S. Department of Justice (“DOJ”) regarding the possibility of violations by the Company or its subsidiaries arising under other laws stemming from matters covered by the SEC investigation as well as certain preliminary inquiries regarding compliance with anti-trust laws applicable to the U.S. and international tetra ethyl lead markets. The subjects into which the SEC and DOJ have inquired include areas that concern certain former and current executives of the Company, including our former CEO, who resigned on March 20, 2009. The Company, and its officers and directors are cooperating with the SEC and DOJ investigations.

On February 19, 2008, the Board of Directors of the Company formed a committee comprised of the chairmen of the Board, the Audit Committee and the Nominating and Governance Committee, all of whom were independent directors. (The chairman of the Nominating and Governance Committee retired as a director of the Company effective May 6, 2008, but his services were retained in an independent capacity as a member of the committee until October 1, 2009 when he resigned. Mr. Haubold did not resign as a result of any dispute or disagreement with the Company or the committee). External counsel to the Company, reporting to the committee has, on behalf of the committee, conducted and will continue to conduct an investigation into the circumstances giving rise to the SEC and DOJ investigations. External counsel reports directly to the committee and assists in connection with communications and interactions with the SEC and DOJ.

On March 5, 2008, a letter was received by the Company from the DOJ in which a request for a wider and more detailed range of documents was made. A further letter was received from the DOJ on June 13, 2009 which contained requests for information made by the U.S. Office of Foreign Assets Control (“OFAC”). In addition to the voluntary disclosure made in relation to the Bycosin disposal OFAC is inquiring into business the Company may have conducted in countries in respect of which there are U.S. laws and regulations that restrict trade.

On July 31, 2009, the DOJ issued a press release in which it disclosed the arrest of an individual and the unsealing of an August 7, 2008 indictment in the U.S. District Court for the District of Columbia against the individual for certain FCPA violations relating to his alleged participation in an eight-year conspiracy to defraud the OFFP and to bribe Iraqi government officials on behalf of a publicly traded U.S. chemical company in connection with the sale of a chemical additive used in the refining of leaded fuel. This individual is the Company’s former agent for Iraq and certain other markets and the Company understands the indictment to relate to the matters that are the subject of the OFFP and related FCPA investigations of the Company.

Separately, on May 21, 2008, the United Kingdom’s Serious Fraud Office (“SFO”) notified Innospec Limited, a wholly owned subsidiary of the Company, that it had commenced an investigation into certain contracts involving British companies under the OFFP. As part of this investigation, the SFO has asked the Company to produce documents in respect of the Company’s participation in the OFFP between January 1, 1996 and December 31, 2003. Following receipt of the SFO’s notice the Company has instructed external legal counsel to advise and assist in relation to the investigation and the Company and its directors and officers intend to cooperate with the SFO. On October 16, 2008, the Company was further notified that the scope of the SFO’s investigation would extend to matters relating to potential bribery involving overseas commercial agents that are already in the large part the subject of the ongoing DOJ and SEC investigations. This investigation by the SFO similarly includes areas that concern certain former and current executives of the Company.

The Company and its officers and directors intend to continue to cooperate with the SEC, DOJ and SFO.

The outcome of these investigations remains uncertain to the Company. Discussions with the SEC, DOJ and SFO are ongoing in an effort to resolve these investigations, but whether agreement can be reached, and on what terms, is uncertain. On the facts available to us we are currently unable to determine the amount, if any, of probable disgorgement, penalties and/or fines that we may be subject to. The amount of any disgorgements, penalties and/or fines that the Company could face depends on a number of eventual factors which are not currently known to the Company or have not yet been resolved with the relevant government authorities, including findings by relevant authorities regarding the amount, nature and scope of any improper payments, the amount of any pecuniary gain involved, the Company’s ability to pay, and the level of cooperation provided to government authorities during the investigations. For accounting purposes, based on a potential settlement range of $18.3 million to $63.4 million in connection with the ongoing discussions with government authorities, we have recorded in the third quarter of 2009 an $18.3 million accrual for potential global settlement of these investigations as required under U.S. GAAP."

The former agent referenced in Innospec's disclosure is presumably Ousama Naaman (see here).

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Was the DOJ's FCPA Enforcement Action Against Siemens Award-Worthy?

That's the question I have after reading that the DOJ recently awarded distinguished service awards to eight individuals involved in its Siemens FCPA enforcement action.

First, let me be clear. With the post, I mean no disrespect to the award recipients - I used to work with one recipient, and I congratulate all the recipients for the recognition received by their employer. Rather, my post is a commentary on DOJ's enforcement of the FCPA.

With that out of the way, let's return to the question - was the DOJ's FCPA enforcement action against Siemens award-worthy?

The DOJ press release announcing the awards (see here) states that all DOJ award recipients (not just those receiving an award in connection with the Siemens matter) have “advanced the interests of justice on behalf of the American people.”

As to the recipients specifically receiving an award in connection with the Siemens FCPA enforcement matter, the press release states:

"The department’s investigation uncovered evidence of hundreds of millions of dollars of corrupt payments in dozens of countries spanning several decades, and in virtually every Siemens operating group and region. The Department’s prosecution was announced simultaneously and coordinated with a civil enforcement action by the Securities and Exchange Commission (SEC) and a criminal prosecution by the Munich Public Prosecutor’s Office, resulting in overall sanctions of more than $1.6 billion. The Department of Justice’s coordination of its settlement not only with the SEC, but also with a foreign regulator sets a new standard in international cooperation and coordination, and serves as a model for future global anti-corruption enforcement."

In Attorney General Holder’s speech at the actual awards ceremony (see here), he said to the award recipients:

“... you have not just my sincere gratitude, but the knowledge that you have all truly done justice on behalf of the American people.”

Using Holder's words to thus ask the question - did the DOJ's FCPA enforcement action against Siemens "advance[] the interests of justice on behalf of the American people?"

In FCPA terms - did the DOJ's FCPA enforcement action against Siemens represent a "red-letter" day (i.e. a good day for FCPA enforcement) or a "black-letter" day (i.e. a bad day for FCPA enforcement)?

Reasonable minds may differ as to the answer, but for the reasons stated below, I submit that DOJ's FCPA enforcement action against Siemens was a "black-letter" day in the history of FCPA enforcement - a farcical facade of enforcement if ever there was such a thing. Surely not an award-worthy event.

First, some background.

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.

Resolution of the FCPA charges against Siemens (and its affiliates) included both DOJ and Securities and Exchange Commission ("SEC") enforcement actions.

Because this post is about the DOJ awards, and more broadly DOJ FCPA enforcement, the below background information relates only to the DOJ enforcement action. (See here for all DOJ material related to the enforcement action including the criminal informations against Siemens and its affiliates, the DOJ plea agreement and sentencing memo, the DOJ news release and a transcript of the DOJ press conference).

In the DOJ enforcement action, Siemens pleaded guilty to a two-count criminal information charging violations of the FCPA's books and records and internal control provisions. The criminal information describes approximately $1.36 billion in payments Siemens made through various mechanisms, including approximately $555 million paid for unknown purposes (including approximately $341 million in direct payments to business consultants for unknown purposes) and approximately $806 million intended, in whole or in part, as corrupt payments to foreign officials.

According to the DOJ, for much of Siemens operations around the world "bribery was nothing less than standard operating procedure" and the criminal information details improper conduct in various of Siemens operating groups and subsidiaries around the world, several of which had offices in the U.S.

In conjunction with the filing of the Siemens' criminal information, the DOJ also filed separate criminal informations against Siemens' subsidiaries in Argentina, Bangladesh and Venezuela charging each with conspiracy to violate the FCPA's anti-bribery provisions and books and records provisions in connection with projects in those countries.

The total criminal penalty was $450 million (a $448.5 million fine against Siemens and a $500,000 fine against each of the three subsidiaries).

In agreeing to fines and penalties below the maximum $2.7 billion available under the advisory U.S. Sentencing Guidelines, the DOJ noted that resolution of the matter reflected, in large part, Siemens' actions in disclosing the conduct at issue to U.S. enforcement agencies after German authorities searched its offices and after Siemens conducted an extensive internal investigation. The DOJ specifically noted, among other things, the company's "extraordinary" cooperation in connection with its investigation (and the investigations of foreign law enforcement agencies), the "unprecedented" scope of the company's internal investigation which included virtually all aspects of its worldwide operations, and the significant remedial measures the company has undertaken.

With that background out of the way, and before returning to the ultimate question, is it really accurate for the DOJ to say that it "uncovered evidence of hundreds of millions of dollars of corrupt payments in dozens of countries spanning several decades, and in virtually every Siemens operating group and region?"

Use of the self-congratulatory term "uncovered" would seem a bit distorted given that the DOJ itself noted that "[t]he resolution of the U.S. criminal investigation of Siemens AG and its subsidiaries reflects, in large part, the actions of Siemens AG and its audit committee in disclosing potential FCPA violations to the Department after the Munich Public Prosecutor's Office initiated searches of multiple Siemens AG offices and homes of Siemens AG employees." (see here at p. 3).

Whether DOJ "uncovered" Siemens conduct or not is besides the point. The question remains - was the DOJ's FCPA enforcement action against Siemens award-worthy?

An initial reaction is most likely - "why of course, handing down the largest ever criminal penalty under the FCPA is indeed award-worthy and a good day for FCPA enforcement."

But, is agreeing to a $450 million criminal penalty when the advisory U.S. Sentencing Guidelines set forth a penalty range of $1.35 - $2.7 billion based on the alleged conduct award-worthy? (See DOJ Sentencing Memo here at p. 12). Is agreeing to a criminal penalty approximately 33% of the amount available under the guidelines (on the low end) and approximately 16% of the amount available (on the high end) “advanc[ing] the interests of justice on behalf of the American people?" If the answer is yes, what then does this say about the guidelines' formula for calculating criminal fines?

But, regardless of the guidelines, is agreeing to a $450 million criminal penalty when, per the DOJ, Siemens' corrupt or questionable payments totaled $1.36 billion award-worthy? Is agreeing to a criminal penalty approximately 33% of the amount of the actual improper or questionable payments "advanc[ing] the interests of justice on behalf of the American people?"

But, is agreeing to a $500,000 fine based on allegations of making over $31 million in corrupt payments in exchange for favorable business treatment in connection with a $1 billion project in Argentina award-worthy? Is agreeing to a criminal penalty approximately 2% of the amount of the actual corrupt payments "advanc[ing] the interests of justice on behalf of the American people?"

But, is agreeing to a $500,000 fine based on allegations of making over $18 million in corrupt payments in exchange for favorable business treatment in connection with two major metropolitian mass transit projects in Venezuela award-worthy? Is agreeing to a criminal penalty approximately 3% of the amount of the actual corrupt payments "advanc[ing] the interests of justice on behalf of the American people."

But, is agreeing to a $500,000 fine based on allegations of making over $5 million in corrupt payments in exchange for favorable treatment during the bidding process on a mobile telephone project in Bangladesh award-worthy? Is agreeing to a criminal penalty approximately 10% of the amount of the actual corrupt payments "advanc[ing] the interests of justice on behalf of the American people?"

Numbers, schulmbers you may be saying.

OK fine, but here is the real-kicker in my mind. Despite the DOJ's rhetoric - that Siemens engaged in bribery that was "unprecedented in scale and geographic scope" and that Siemens was a company where "bribery was nothing less than standard operating procedure" you will not find anywhere in the DOJ's enforcement action against Siemens FCPA anti-bribery charges!

If ever facts were deserving of an FCPA anti-bribery charge, would it not be the Siemens facts? Per the DOJ's information charging Siemens with FCPA books and records and internal controls only, the essential elements of an anti-bribery charge would seem to be present. Among other relevant facts, beginning in March 2001, Siemens became an "issuer" and thus subject to the FCPA's anti-bribery provisions and certain of its subsidiaries involved in the improper payments had offices in the U.S.

Yet, one will not find FCPA anti-bribery charges in the DOJ's enforcement action against Siemens despite the company being engaged in a bribery scheme that was "unprecedented in scale and geographic scope" and Siemens being a company where "bribery was nothing less than standard operating procedure."

Is the exercise of prosecutorial discretion in this instance, in the face of these facts, award-worthy and an example of "advanc[ing] the interests of justice on behalf of the American people?"

I submit that the answer to all of these above questions is a resounding NO and that DOJ's FCPA enforcement action against Siemens was a "black-letter" day in the history of FCPA enforcement - a farcical facade of enforcement if ever there was such a thing. Surely not an award-worthy event.

Those who frequent this blog are well aware of my frequent criticisms of DOJ/SEC FCPA enforcement as being too aggressive most often where DOJ/SEC advance untested legal theories resulting in an enforcement action being settled even though it is questionable as to whether the elements of an anti-bribery violation are even met.

However, I submit that the FCPA is a fundamentally sound statute when enforced by DOJ/SEC in a way that is consistent with Congressional intent (i.e. when the facts applied to the law results in all the elements of an anti-bribery violation being met).

In these cases, an FCPA violator ought to be punished and punished aggressively to deter others from engaging in bribery "unprecedented in scale and geographic scope" and operating a company where "bribery [is] nothing less than standard operating procedure."

I understand that cooperation means something in corporation criminal resolutions and I understand that Siemens, in addition to paying an SEC fine, paid fines in other jurisdictions (most notably in Germany).

I also understand that justice is probably not served when criminal fines and penalties force a company into bankruptcy.

Nevertheless, given the figures above, it is disturbing to see how Siemens ended up paying significantly less in DOJ criminal fines than the actual amount of the corrupt or questionable payments. In other words, even after payment of the $450 million DOJ criminal fine, Siemens appears to have profited, rather handsomely, from the bribery scheme that was "unprecedented in scale and geographic scope."

And consider this.

During the five year period (2004-2008), a period which does not even cover the entire time frame of Siemens' "unprecedented" bribery scheme, its net income was approximately $28.3 billion (after a currency conversion) (see here). Given these numbers, is a $450 million criminal fine even noteworthy, let alone award-worthy?

The final act in this comedy would seem to be this.

Earlier this year, a few weeks after DOJ termed Siemens' bribery "unprecedented in scale and geographic scope" and Siemens as a company where "bribery was nothing less than standard operating procedure" the company issued a new release (see here) announcing that:

"the lead agency for U.S. federal government contracts, the Defense Logistics Agency (DLA), issued a formal determination that Siemens remains a responsible contractor for U.S. government business."

If Siemens is a "responsible" contractor, I can't imagine a set of facts which would lead the DLA to conclude that a company is an "irresponsible" contractor for U.S. government business!

So what do you think - was the DOJ's FCPA enforcement action against Siemens award-worthy or did it represent a farcical facade of enforcement?

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Changing of the Guard?

Mark Mendelsohn, "Mr. FCPA" at the DOJ, is looking to leave government service and is in negotiations with private law firms for new employment. So reports our friends over at the Main Justice Blog (see here).

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Changing of the Guard?

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