Survey Says ...

KPMG Forensic recently released (here) its 2011 "Global Anti-Bribery and Corruption Survey." KPMG "surveyed 214 executives in the U.S. and U.K. to identify their most vexing anti-bribery and corruption ("AB&C") compliance challenges and to understand how companies are preventing, detecting and responding to AB&C risk." In summary form, the KPMG survey found that "despite a greater awareness of the business and legal imperatives for well-developed AB&C compliance programs among survey respondents, many compliance programs lack sufficient depth and breadth to effectively mitigate AB&C risk around the world."

According to the survey, "the three most significant AB&C compliance challenges cited by both U.S. and U.K. respondents are auditing third parties for compliance, difficulty in performing effective due diligence on foreign agents/third parties, and variations in country requirements and local laws on issues such as data privacy and facilitating payments."

Some survey results that caught my eye.

Nearly 60% of survey respondents said it was "not at all challenging" to "continue to run business while managing investigations."

Even though third-party (agent, distributor, joint venture partner, etc) risk ranked high in the survey results, only approximately 60% of respondents actually distribute AB&C policies and procedures to third parties and 60% of respondents said that most third party agents are not required to take AB&C training (in 2008 the U.S. response was 93%). Of further interest regarding third-parties, nearly 60% of respondents have "right to audit" clauses in contracts with third parties, but approximately 65% of respondents indicated that they have not exercised their "right to audit."

Even though facilitating payments are exempted under the FCPA (they are not under the U.K. Bribery Act or the OECD Convention) only 13% of U.S. respondents allow such payments (in 2008, 24% of U.S. respondents said they allowed such payments).

"More than 70% or respondents (73% in the U.K. and 70% in the U.S.) agreed there are places in the world where business cannot be done without engaging in bribery and corruption."

"To mitigate the risk of doing business in countries in which bribery and corruption is perceived to be endemic, respondents' favored strategy was to provide additional training (43% of UK and 49% of US respondents), with enhanced internal controls, more closely monitoring operations, conducting due diligence on third parties, and obtaining compliance certifications all following closely."

"An additional risk mitigation strategy - selected by 32% of U.K. and 25% of U.S. respondents - was to not do business in certain countries." The survey results do not breakdown this response in any detail, but it would be interesting to know which countries the 25% of U.S. respondents were not willing to do business in because of corruption concerns. My guess is that these countries are not high-growth, high-potential markets.

The KPMG survey was conducted via telephone between October-November 2010 and included 214 executives (106 in the U.S., 108 in the U.K.) who identified themselves as "one of the most senior persons in charge of day-to-day AB&C matters at their company."

KPMG Forensic assists "clients in achieving the highest levels of business integrity through the prevention, detection, and investigation of fraud and misconduct ...".

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Analyzing Alcatel-Lucent

In 2006, Alcatel-Lucent, S.A. ("Alcatel") was formed when an Alcatel S.A. subsidiary merged with Lucent Technologies, Inc. Prior to the merger, Alcatel was a worldwide provider of a wide variety of telecommunications equipment and services and other technology products. The company operated in more than 130 countries directly and through certain wholly owned and indirect subsidiaries including in Costa Rica, Honduras, Malaysia and Taiwan. From 1998 until late 2006, ADR shares of Alcatel were traded on the New York Stock Exchange.

In 2007, the right side of the hyphen - Lucent Technologies - settled an FCPA enforcement action (see here and here).

In 2010, in what was the last FCPA enforcement action of the year, the left side of the hyphen - Alcatel and certain of its subsidiaries - settled an FCPA enforcement.

This post analyzes the Alcatel-Lucent enforcement action. The enforcement action (all 360 pages) is a FCPA feast. Principally based on the lack of due diligence of third-party agents, the enforcement action serves up the following: lots of alleged state-owned or state-controlled telecommunication entities; consultants hired after contracts were secured; a purported telecommunications consultant with only perfume experience; payments to legislators and political parties; things of value including excessive travel and entertainment expenses and crystal for the secretary; joint ventures; and payments from New York and Miami bank accounts.

The Alcatel-Lucent enforcement action involved both a DOJ and SEC component. Total settlement amount was approximately $137.4 million ($92 million criminal fine via DOJ plea agreements and a deferred prosecution agreement; $45.4 million in disgorgement via a SEC settled complaint).

DOJ

The DOJ enforcement action involved a criminal information against Alcatel-Lucent, S.A. ("Alcatel") resolved through a deferred prosecution agreement and a criminal information against Alcatel-Lucent France S.A. ("Alcatel CIT"), Alcatel-Lucent Trade International A.G. ("Alcatel Standard"), and Alcatel CentroAmerica, S.A. ("ACR") resolved through plea agreements. See here for the DOJ release.

Alcatel-Lucent S.A. Criminal Information

The information (here) begins with a heading "Background Regarding Alcatel's Business Practices and the State of Its Internal Controls."

It states as follows. "Starting in the 1990s and continuing through at least last 2006, Alcatel pursued many of its business opportunities around the world through the use of third-party agents and consultants. This business model was shown to be prone to corruption, as consultants were repeatedly used as conduits for bribe payments to foreign officials (and business executives of private customers) to obtain or retain business in many countries."

The information also highlights Alcatel's "de-centralized business structure" which permitted different Alcatel employees around the world "to initially vet the the third-party consultants, and then rely on Executive 1 [a French citizen who served as Chief Executive Officer of Alcatel Standard in Basel, Switzerland] at Alcatel to perform due diligence on them." According to the information, "this de-centralized structure and approval process permitted corruption to occur, as the local employees were more interested in obtaining business than ensuring that business was won ethically and legally."

Further, the information alleges that "Executive 1 performed no due diligence of substance and remained, at best, deliberately ignorant of the true purpose behind the retention of and payment to many of the third-party consultants." Specifically, the information alleges that "Executive 1 made no effort, or virtually no effort, to verify the information provided by the consultant in the Consultant Profile [a form the consultant was supposed to complete with information concerning its ownership, business activities, capabilities, banking arrangements, and professional references], apart from using Dun & Bradstreet reports to confirm the consultant's existence and physical address." According to the information, "if the paperwork was completed, regardless of any obvious issues (such as close relationships with foreign officials or a clear lack of skill, experience or telecommunications expertise), Executive 1 authorized hiring and paying the third-party consultant."

As to payments to the consultants, the information alleges that "Alcatel Standard [a wholly-owned subsidiary of Alcatel located and incorporated in Switzerland and an entity "responsible for entering into most agreements with consultants worldwide on behalf of Alcatel and certain other entities] would contract with the third-party consultant and then Alcatel CIT [a wholly owned subsidiary of Alcatel located and incorporated in France] would pay the consultant" including through a bank account at ABN Amro Bank in New York.

The information alleges as follows. "Often senior executives at Alcatel CIT, Alcatel Standard, and ACR [a wholly owned subsidiary of Alcatel located and incorporated in Costa Rica], among others, knew bribes were being paid, or were aware of the high probability that many of these third-party consultants were paying bribes, to foreign officials to obtain or retain business. For example, in a significant number of instances, the consultant contracts were executed after Alcatel had already obtained the customer business, the consultant commissions were excessive, and lump sum payments were made to the consultants that did not appear to correspond to any one one contract."

According to the information, "Alcatel CIT, Alcatel Standard, ACR, and certain employees of Alcatel CIT, Alcatel Standard, and ACR knew, or purposefully ignored" that much of the consultant documentation "did not accurately reflect the true nature and purpose of the agreements" and that "many of the invoices submitted by various third-party consultants falsely claimed that legitimate work had been completed, while the true purpose of the monies sought by the invoices was to funnel all or some of the money to foreign officials, directly and indirectly."

The information alleges that "these transactions were designed to circumvent Alcatel's internal controls system and were further undertaken knowing that they would not be accurately and fairly reflected in Alcatel CIT, Alcatel Standard, and ACR's books and records, which were included in the consolidated financial statements that Alcatel filed with the SEC."

The information then contains ten separate sections: conduct in Costa Rica; conduct in Honduras; conduct in Malaysia; conduct in Taiwan; conduct in Kenya; conduct in Nigeria; conduct in Bangladesh; conduct in Ecuador; conduct in Nicaragua; and other consultancy agreements entered into without proper due diligence.

Costa Rica

The alleged conduct focuses on the actions of Christian Sapsizian and Edgar Valverde Acosta and consultancy agreements on behalf of Alcatel CIT with two Costa Rican consultants which were intended to make improper payments to Costa Rican government officials for telecommunications contracts. According to the indictment, Sapsizian (a French citizen) was a long-term employee of Alcatel and Alcatel CIT responsible for developing business in Latin America. Valverde (a Costa Rica citizen) served as the President of ACR and the Country Senior Officer of Costa Rica. See here for the prior enforcement actions against Sapsizian and Valverde.

According to the information, "both consultants had many personal contacts at ICE [Instituto Costarricense de Electricidad S.A. - a "wholly state-owned telecommunications authority in Costa Rica responsible for awarding and administering public tenders for telecommunications contracts].

According to the information, Sapsizian's supervisor, the President of Area 1 who worked in Miami, approved more than $18 million in payments to the consultants notwithstanding that the President of Area 1, according to Sapsizian, "told him on several occasions that he knew he was 'risking jail time' as a result of his approval of these payments, which he understood would, at least in part, ultimately wind up in the hands of public officials."

The information alleges that various Alcatel entities "conducted insufficient due diligence" on the consultants and that "neither Alcatel nor any of its subsidiaries took sufficient steps to ensure that the consultants were complying with the FCPA or other relevant anti-corruption laws."

According to the information, the above described payments were ultimately used to provide money to various ICE officials, a Costa Rica executive branch official, and a Costa Rica legislator, that ultimately assisted Alcatel CIT obtain a $44 million contract, a $149.5 million contract, a $109.5 million contract.

The information also alleges that Sapsizian "approved the payment of approximately $25,000 in travel, hotel, and other expenses incurred by ICE officials during a primarily pleasure trip to Paris" - a trip that "was partially intended to reward these government officials for providing Alcatel with lucrative contracts ...".

Based on this conduct, the information alleges that "employees of Alcatel CIT, Alcatel Standard, and ACR knowingly circumvented Alcatel's internal controls system and made inaccurate and false entries in the books and records of Alcatel CIT, Alcatel Standard, and ACR, whose financial results were included in the consolidated financial statements of Alcatel submitted to the SEC. As a result of the contracts won by Alcatel CIT in Costa Rica as a result of bribe payments, Alcatel earned approximately $23,661,000 in profits."

Honduras

The information charges that "employees of ACR, along with Sapsizian, pursued business opportunities on behalf of Alcatel in Honduras with Hondutel [Empresa Hondurena de Telecomunicaciones - an alleged wholly state-owned telecommunications authority in Honduras responsible for providing telecommunications services in Honduras including evaluating and awarding telecommunications contracts on behalf of the government of Honduras] and Conatel [Comision Nacional de Telecouniciaciones - an alleged Honduran government agency that regulated the telecommunications sector in Honduras that issued licenses and concessions for fixed-line and wireless telephony, data transmission and internet services]."

According to the information, Alcatel CIT and Alcatel Mexico made large commission payments to at least one consultant, knowing that all or some of the money paid to that consultant would be paid to a close relative of a Honduran government official, with the high probability that some or all of the money would be passed on to the Honduran government official, in exchange for favorable treatment of Alcatel, Alcatel CIT, and Alcatel Mexico."

According to the information, the consultant was retained at the request of a high-ranking government official in the Honduran executive branch; however, the consultant was an exclusive distributor of "brand name perfumes" and had no contacts in, or prior experience with, the telecommunications industry in Honduras or anywhere else.

The information alleges that in retaining the consultant, "Alcatel Standard knowingly failed to conduct appropriate due dligence" and "did not follow up on numerous, obvious red flags."

The information alleges that by utilizing the services of the consultant, Hondutel awarded Alcatel a $1 million contract and four additional contracts for a combined value of approximately $47 million.

The information also alleges that "Alcatel CIT and ACR employees arranged for several other Honduran government officials to take primarily pleasure trips to France, which were paid by Alcatel CIT or ACR directly." In addition, the information charges that a "high-ranking executive at Hondutel" also "received gifts and improper payments from Alcatel CIT and ACR employees" including $2,000 for an educational trip for the official's daughter and a trip to Paris (along with the official's spouse) that mostly consisted of "touring activities via a chauffeur-driven vehicle." Further, the information alleges that "Alcatel CIT also made payments to a Hondutel attorney who worked" on a contract secured by Alcatel including paying for a trip by the attorney and the attorney's daughter to Paris.

Based on this conduct, the information alleges that "employees of Alcatel CIT, Alcatel Standard, and ACR knowingly circumvented Alcatel's internal controls system and caused inaccurate and false entries in the books and records of Alcatel CIT, Alcatel Standard, and ACR, whose financial results were included in the consolidated financial statements of Alcatel submitted to the SEC." According to the information, "as a result of the bribe payments, Alcatel earned approximately $870,000 in profits."

Malaysia

The information alleges that "in at least 17 instances in or around 2004 to in or around 2006, Alcatel Malaysia [a joint venture in which Alcatel owned a majority share of and exercised control of] employees, with the consent and approval of Alcatel Malaysia's management, such as Executive 2 [Alcatel Malaysia's Country Senior Officer] and Executive 3 [Alcatel Malaysia's Chief Financial Officer], made improper payments to Telekcom Malaysia [an alleged state-owned and controlled telecommunications provider in Malaysia responsible for awarding telecommunications contracts 43% owned by the Malaysian Ministry of Finance] employees in exchange for nonpublic information relating to ongoing public tenders." According to the information, "the documents purchased generally consisted of internal assessments by Celcom's [Telekom Malaysia's wholly owned subsidiary] tender committee of non-public pricing information." According to the information, "eight of the 17 improper payments to Telekom Malaysia employees were made in connection with a single public tender that Alcatel Malaysia ultimately won ...". The information alleges that the payments were falsely characterized as "document fees" or accurately as "purchase of tender documents."

The information further alleges that Alcatel Standard entered into a consulting agreement for more than $500,000 with a Malaysian consultant even though "Alcatel typically paid its agents and consultants commission rates based on the total value of a contract rather than pay a fixed fee for services." According to the information, "at the time the payments were made to Malaysian Consultant 1, Alcatel Malaysia and Alcatel Standard were aware of a significant risk that Malaysian Consultant 1 would pass on all or a part of these payments to foreign officials."

The information further alleges that Alcatel Standard entered into another consulting agreement with another consultant by which Alcatel Standard agreed to pay the consultant $500,000 for a "strategic intelligence report on Celcom's positioning in the celluar industry in relation to its competitors." According to the information, despite paying the consultant "half a million dollars for this report ... there is no evidence that Malaysian Consultant 2 did any actual work for Alcatel Malaysia or ever produced the report." The information states that "Alcatel Standard and Alcatel Malaysia were aware of a significant risk that Malaysian Consultant 2 was serving merely as a conduit for bribe payments to foreign officials."

The information further alleges, in summary fashion, as follows. "Alcatel Malaysia lacked internal controls, such as formal policies covering expenditure for gifts, travel, and entertainment for customers, leading to Alcatel Malaysia employees giving lavish gifts to Telekom Malaysia officials."

Based on this conduct, the information alleges that "Alcatel Standard and Alcatel Malaysia knowingly circumvented Alcatel's internal controls system and caused inaccurate and false entries in the books and records of Alcatel Standard and Alcatel Malaysia, whose financial results were included in the consolidated financial statements of Alcatel submitted to the SEC." The information states that "although Alcatel won the $85 million Celcom contract, Alcatel did not generate any profits from it."

Taiwan

According to the information, Alcatel pursued business in Taiwan through its indirect subsidiary Alcatel SEL, a company located and incorporated in Germany. The information states that Executive 4 [a German citizen who served on Alcatel SEL's director of international business ans sales] hired two third-party consultants to assist Alcatel SEL and Taisel, a joint venture 60% owned by an Alcatel subsidiary in obtaiing an axle counting contracts from the TRA [the Taiwan Railway Administration - an alleged wholly state-owned authority in Taiwan responsible for managing, maintaining, and running passenger freight services on Taiwan's railroad lines]." According to the information, "both consultants claimed to have close ties to certain legislators in the Taiwanese government who were understood to have influence in awarding the contract due to their particular responsibilities in the legislature."

The information alleges that the "purpose behind Alcatel's hiring of Taiwanese Consultant 1 was so that Alcatel SEL could make improper payments to three Taiwanese legislators who had influence in the award of the TRA axle counting contract." According to the information, after Taisel has been awarded the contract, "Alcatel SEL paid Taiwanese Consultant 1 a commission of approximately $921,413 by wire transfer from Alcatel SEL's ABN Amro bank account in New York" and that Taiwanese Consultant 1, in turn, "made improper payments to two Taiwanese legislators: Legislator 2 and Legislator 3 - both members of the Legislative Yuan, the unicameral legislative assembly of the Republic of China. Among other things, the information alleges: that the the consultant promised approximately $180,000 in campaign funds for Legislator 3's 2004 election campaign and then paid Legislator 3 approximately $90,000 after Alcatel SEL won the bid; that Executive 4 and the consultant "spent approximately $8,000 on trips to Germany" that were "primarly for personal, entertainment purposes, with only nominal business justification;" that Alcatel SEL paid the consultant "approximately $3,000 to reimburse it for a set of crystal given to the secretary of the Taiwan Transportation and Communications Minister."

The information also alleges that Executive 4 also hired another consultant because "Taiwanese Consultant 2's owner was the brother of Legislator 4, who had influence with respect to TRA matters." The information alleges that "to bribe Legislator 4, Alcatel SEL arranged for a bogus consulting agreement between Taisel and Taiwanese Consultant 2."

The information alleges as follows. "Neither Taiwanese Consultant 1 nor Taiwanese Consultant 2 provided legitimate services to Alcatel or Alcatel SEL. Their only function was to pass on improper payments to three Taiwanese legislators on behalf of Alcatel SEL and Taisel. On or about December 30, 2003 Taisel's bid was accepted by the TRA, which granted Taisel a supply contract worth approximately $19.2 million ...".

According to the information, "Alcatel SEL's financial results were included in the consolidated financial statements of Alcatel submitted to the SEC" and "as a result of contracts won by Alcatel in Taiwan as a result of bribe payments, Alcatel earned approximately $4,342,600 in profits."

Kenya

The information describes a Kenyan joint venture ("Kenyan JV") formed by a French telecommunications company ("French Telecom") and a Kenyan company ("Kenyan Company") to apply for a mobile telecommunications license that the Kenyan JV was awarded for approximately $55 million. Several companies, including Alcatel CIT, bid to provide approximately $87 million in infrastructure and services to the Kenyan JV. The information alleges that Alcatel CIT was informed by French Telecom that Alcatel CIT "would win the bid under one condition: an Alcatel entity had to make improper payments to an intermediary in the approximate amount of $20 million."

The information then describes the intermediary and payments made to it and concludes with the following paragraph. "After entering into the various contracts, the intermediary provided monthly reports and economic intelligence on the telecommunications market in Africa, but never provided any information related to the 2nd GSM license or the Kenyan telecommunications market. In light of the huge amounts of the payments, the fact that the intermediary performed little legitimate work in connection with the 2nd GSM license, and the fact that Company Z [another company suggested by the intermediary] was an offshore holding of Kenyan Company, there is a high probability that all or a portion of the approximately $20 million in payments made by Alcatel CIT to the intermediary and the related entities was passed on to Kenyan Company, which in turn passed on the funds to Kenyan government officials who had played a role in awarding the original contract to French Telecom."

Nigeria

The information states that between 1999 and 2007, Alcatel pursued business with various Nigerian customers and alleges as follows.

"Certain Alcatel subsidiaries made improper payments to government officials in Nigeria in the following contexts: (a) payments made to government officials for the purpose of reducing tax or other liabilities; (b) payments made to government officials to obtain security services from the Nigerian police; (c) a payment of approximately $75,000 to a former Nigerian Ambassador to the United Nations for the purpose of arranging meetings between Alcatel representatives and Nigerian Senior Government Official 1, a high-ranking official in the Nigerian executive branch; (d) payments made to government officials for the purpose of securing recovery of a debt totaling approximately $36.5 million owed by the government of Nigeria to ITT Nigeria [an Alcatel entity]; and (e) a payment to a People's Democractic Party official. These payments were not described accurately and fairly on Alcatel's books and records."

The information also alleges as follows. "Alcatel personnel also made improper payments via a consultant to a Senior Executive at Nigerian Telecommunications Company 1" and "Alcatel also made large improper payments to two other consultants which were owned at least in part by a relative of the Senior Executive at Nigerian Telecommunications Company 1." "These payments were not described accurately and fairly on Alcatel's books and records." There is nothing in the information to suggest that Nigerian Telecommunications Company 1 was a state-owned or controlled enterprise and the information refers to payments to the Senior Executive as "commercial bribe payments."

Bangladesh

The information generally alleges that "Alcatel generated a significant portion of its revenue in Bangladesh from Bangladesh Telegraph and Telephone Board, the state-controlled telecommunications services provider" and that Alcatel used an agent in Bangladesh but "Alcatel Standard did not conduct adequate due diligence" on the consultant. In addition, the information alleges that Alcatel Standard retained the agent in connection with a submarine cable project connecting fourteen countries - Alcatel's portion of the contract was approximately $258 million. According to the information, Alcatel CIT paid the consultant approximately $626,492 in compensation for services provided in connection with the project and approximately $2,524,939 in connection with various upgrades to a predecessor of the project "aware of a significant risk that Bangladsh Consultant would pass on all or a part of these payments to foreign officials."

Ecuador

According to the information, "Alcatel conducted business in Ecuador with three major telecommunicatios customers, all of which were state-owned: Andinatel, Pacifictel, and Empresa Municipl de Telecomunicaciones, Aqua Potable, Alcantarillados y Saneamiento. The information alleges that Alcatel retained a consultant in Ecuador ("a wealthy businessman"), but that the consultant and the entities he controlled "did little legitimate work for Alcatel." The information alleges as follows. "Instead, it was anticipated that Ecuadorian Consultant would funnel a portion of the funds Alcatel paid him to officials of the Ecuadorian state-owned telecommunications companies in order to secure business and other benefits for Alcatel. Improper payments were anticipated to be made or offered in connection with at least nine contracts with government-owned telecommunication companies."

According to the information, at least some of Alcatel's payments to the consultant wre made to bank accounts in Miami.

In addition, the information alleges as follows. "Alcatel also paid for trips taken by officials of the three telecommunications companies that were principally for pleasure. For example, both the Vice-President and the Chairman of the Board of Pacifictel received improper all-expenses paid trips to France."

Nicaragua

According to the information, "Alcatel's only customer in Nicaragua was Empresa Nicaraguense de Telecomunicaciones S.A. ("Enitel") which was state-owned during the relevant time period." The Ecuadorian consultant referenced above, also served as Alcatel's consultant in Nicaragua. According to the information, "with the assistance of Ecuadorian Consultant, Alcatel CIT secured two contracts with Enitel" valued at approximately $1.6 million and $370,000. The information alleges that Alcatel CIT made payments totaling approximately $229,3822 to the Miami bank account of the consultant and that the consultant "likely used a portion of these payments to bribe certain key Enitel officials in order to influence Enitel to award the two contracts to Alcatel, to obtain confidential information about competing bids, and to secure favorable financial terms." The information alleges that payments to the consultant were "identified in Alcatel's books and records as consulting fees, and thus the description of those payments did not accurately and fairly reflect those transactions."

The information further alleges that "Alcatel CIT also provided a trip to Paris and Madrid to two Enitel officials in late 2001 in order to encourage the execution of one of the two contracts" and that the "purpose of the trip was largley for pleasure, and it appears that Alcatel CIT covered all travel costs and a large portion of the expenses."

The substantive portion of the information ends with a section titled "Other Consultancy Agreements Entered Into Without Proper Due Diligence." The allegations concern consultants in Angola, the Ivory Coast, Burkina Faso, Uganda, and Mali. The customers associated with the consultants were either allegedly state-owned or private companies.

Based on all of the above conduct, the information charges Alcatel with violations of the FCPA's internal control provisions. The information alleges that Alcatel "knowingly: (a) failed to implement sufficient anti-bribery compliance policies and procedures; (b) failed to maintain a sufficient system for the selection and approval of consultants, which, in turn, permitted corrupt conduct to occur at certain subsidiaries; (c) entered into purported business consulting agreements with no apparent basis, and without performing any due diligence, sometimes after the cmpany had already won the relevant project; (d) failed to verify information provided by consultants, including failing to follow up in circumstances in which managers knew or were substantially certain illicit activity was taking place; (e) failed to prevent consultants from using multiple shell companies to receive commissions in excess of 10% knowing there was a substantial likelihood those consultants were acting as conduits for corrupt payments; (f) failed to conduct appropriate audits of payments to purported business consultants; (g) failed to prohibit lump sum payments being made to consultants that did not correspond to any contract; (h) failed to prohibit payments to consultants and public officials pursuant to an oral 'gentlemen's agreement'; (i) failed to appropriately investigate and respond to allegations of corrupt payments and discipline employees involved in making corrupt payments; (j) failed to establish a sufficiently empowered and competent Corporate Compliance Officer; (k) failed to exercise due diligence to prevent and detect criminal conduct; (l) failed to take reasonable steps to ensure the company's compliance and ethics program was followed, including monitoring and internal audits to detect criminal conduct; (m) failed to evaluate regularly the effectiveness of the company's compliance and ethics program; and (n) failed to provide appropriate incentives to perform in accordance with the compliance and ethics program."

Based on the above conduct, the information also charges Alcatel with FCPA books and records violations for (a) drafting sham business consulting agreements to justify third party payments; (b) mis-characterizing bribes in the corporate books and records as consulting fees and other seemingly legitimate expenses; (c) justifying payments to purported business consultants based on false invoices; and (d) entering into purported business consulting agreements with no basis, sometimes after Alcatel had won the relevant project.

Alcatel-Lucent DPA

The DOJ's charges against Alcatel were resolved via a deferred prosecution agreement (see here).

Pursuant to the DPA, Alcatel admitted, accepted and acknowledged that it was responsible for the acts of its officers, employees, agents, and those of Alcatel's subsidiaries as described above.

The term of the DPA is three years and it states that the DOJ entered into the agreement "based on the individual facts and circumstances" of the case and Alcatel-Lucent. Among the factors stated are the following.

(a) following press reports concerning bribery by Alcatel, S.A., in Costa Rica, the company investigated and disclosed over the course of several years to the Department and the United States Securities and Exchange Commission the misconduct described above;

(b) Alcatel-Lucent conducted a global internal investigation concerning bribery and related misconduct;

(c) Alcatel-Lucent reported its findings to the Department and the SEC;

(d) after limited and inadequate cooperation for a substantial period of time, Alcatel-Lucent substantially improved its cooperation with the Department's investigation of this matter, as well as the SEC's investigation;

(e) Alcatel-Lucent undertook remedial measures, including the implementation of an enhanced compliance program, and agreed to undertake further remedial measures as contemplated by the DPA;

(f) on its own initiative and at a substantial financial cost, Alcatel-Lucent determined as matter of company policy to no longer use third party sales and marketing agents in conducting its worldwide business; and

(g) Alcatel-Lucent agreed to continue to cooperate with the Department in any ongoing investigation of the conduct of Alcatel-Lucent and its employees, agents, consultants, contractors, subcontractors, and subsidiaries relating to violations of the FCPA.

As stated in the DPA, the fine range for the above describe conduct under the U.S. Sentencing Guidelines was $86.58 - $173.16 million. Pursuant to the DPA, Alcatel-Lucent agreed to pay a monetary penalty of $92 million - a rather rare instance of an FCPA criminal fine actually being within the Guidelines range and not below even the minimum range suggested by the Guidelines. Also relevant is that Alcatel's culpability score was reduced only by -1, reflecting that Alcatel did not receive cooperation credit as many FCPA corporate defendants do receive.

The DPA states that above fine is appropriate given, among other things, "penalties related to the same conduct in Costa Rica [see here], and the extraordinary remedial step of terminating use of third-party sales and marketing agents."

Pursuant to the DPA, Alcatel agreed to a host of compliance undertakings including the retention of an independent compliance monitor "who is a French national" for a three year term. Corporate Monitors used to be common in FCPA enforcement actions (circa 2005-2008), but required use of corporate monitors has become less common over the past few years.

As is standard in FCPA DPAs, Alcatel agreed not to make any public statement "contradicting the acceptance of responsibility by Alcatel-Lucent as set forth" in the DPA and Alcatel-Lucent further agreed to only issue a press release in connection with the DPA if the DOJ does not object to the release.

As to potential debarment issues, the DPA states as follows. "The Department agrees to bring to the attention of governmental and other debarment authorities the facts and circumstances relating to the nature of the conduct underlying this Agreement, including the nature and quality of Alcatel-Lucent's cooperation and remediation. By agreeing to provide this information to debarment authorities, the Department is not agreeing to advocate on behalf of Alcatel-Lucent, but rather is providing facts to be evaluated independently by the debarment authorities."

Alcatel-Lucent France S.A., Alcatel-Lucent Trade International A.G. and Alcatel CentroAmerica, S.A. Criminal Information

The criminal information against the above Alcatel subsidiaries is virtually identical to the above-described criminal information against Alcatel, albeit it is limited to Costa Rica, Honduras, Malaysia, and Taiwan conduct. Based on this conduct, the information charges the entities with conspiracy to violate the FCPA's anti-bribery and books and records and internal control provisions. According to the information, the purpose of the conspiracy was to "secure the assistance of officials of various governments, including those in Costa Rica, Honduras, Malaysia, and Taiwan, in obtaining and retaining lucrative telecommunications business through the offer, promise, and payment of bribes."

Alcatel-Lucent France S.A., Alcatel-Lucent Trade International A.G. and Alcatel CentroAmerica, S.A. Plea Agreements

The above described charges were resolved via separate plea agreements with Alcatel-Lucent France (here), Alcatel-Lucent Trade International (here) and Alcatel CentroAmercia (here). Each plea agreement states that in light of the overall dispositions with the other Alcatel-Lucent entities and "the interrelationship among the charges and conduct underlying those dispositions" the agreed upon fine is $500,000.

SEC

The SEC's civil complaint (here) alleges in summary fashion as follows.

"From December 2001 through June 2006, Alcatel, S.A., now called Alcatel-Lucent, S.A. ("Alcatel" or the "company"), through its subsidiaries and agents, violated the Foreign Corrupt Practices Act by paying more than $8 million in bribes to foreign government officials. Alcatel made these payments to influence acts and decisions by these foreign government officials to obtain or retain business, with the knowledge and approval of certain management level personnel of the relevant Alcatel subsidiaries. Alcatel lacked sufficient internal controls to prevent or detect such improper payments, and improperly recorded the payments in its books and records."

"During this period, Alcatel's agents and/or subsidiaries paid bribes to foreign government officials in several countries to obtain or retain business:

• From December 2001 to October 2004, Alcatel's agents and/or subsidiaries paid at least $7 million in bribes to government officials of Costa Rica to obtain or retain three contracts to provide telephone services in Costa Rica totaling approximately $303 million.

• From December 2002 to June 2006, Alcatel's agents and/or subsidiaries paid bribes to government officials of Honduras to obtain or retain five telecommunications contracts totaling approximately $48 million.

• From October 2003 to May 2004, Alcatel's agents and/or subsidiaries paid bribes to government officials of Taiwan to obtain or retain a railway axle counting contract valued at approximately $27 million.

• From October 2004 to February 2006, Alcatel's agents and/or subsidiaries paid bribes to government officials of Malaysia to obtain or retain a telecommunications contract valued at approximately $85 million."

"All of these payments were undocumented or improperly recorded as consulting fees in the books of Alcatel's subsidiaries, and then consolidated into Alcatel's financial statements. A lax corporate control environment aided Alcatel's improper conduct. Alcatel failed to detect or investigate numerous red flags suggesting that its business consultants were likely making illicit payments and gifts to government officials in these countries at the direction of certain Alcatel employees. The respective heads of several Alcatel subsidiaries and geographical regions, some of whom reported directly to Alcatel's executive committee, authorized extremely high commission payments under circumstances in which they failed to determine whether such payments were, in part, to be funneled to government officials in violation of the FCPA. These high-level employees therefore knew, or were severely reckless in
not knowing, that Alcatel paid bribes to foreign government officials."

The SEC complaint contains allegations about the same "Costa Rica Bribery Scheme," "The Honduras Bribery Scheme," "The Taiwan Bribery Scheme," and "The Malaysia Bribery Scheme" referenced above. Typically, SEC complaints in FCPA matters are more broad than DOJ resolution documents, yet in this case the SEC complaint is more narrow than the DOJ resolution documents in that the SEC complaint does not contain any allegations as to conduct in Kenya, Nigeria, Bangladesh, Ecuador, Nicaragua, Angola, the Ivory Coast, Burkina Faso, Uganda, and Mali - as does the DOJ information.

Based on the above conduct, the SEC charged Alcatel with FCPA anti-bribery and books and records and internal control violations and knowingly failing to implement a system of internal controls and knowingly falsifying books and records.

As to books and records the complaint alleges as follows.

"Specifically, A1catel failed to keep accurate books and records by (1) entering into consulting agreements retroactively; (2) establishing and using a system of intermediaries to obscure the source and destination of funds; (3) making payments pursuant to business consulting agreements that inaccurately described the services provided; (4) generating false invoices and other false documents to justify payments; (5) disbursing funds in cash with inaccurate documentation authorizing or supporting the withdrawals; (6) recording illicit payments as legitimate consulting fees; and (7) recording bribes as payment for legitimate services."

As to internal controls, the complaint alleges as follows.

"Alcatel failed to implement adequate internal controls to comply with the
company's NYSE listing, including the detection and prevention of violations of the FCPA. First, Alcatel and/or its subsidiaries falsified books and records, entered into agreements retroactively, and obscured the purpose for, and ultimate recipient of, illicit payments. Alcatel used business consultants and intermediaries to funnel bribes in at least four countries. Alcatel created and used false invoices and payment documentation under business consulting agreements that described services that were never intended to be rendered. Illicit payments were falsely recorded as expenses for consulting fees."

"Second, Alcatel also routinely circumvented the internal controls the company had in place. Although the company in theory had a policy of "checks and balances" to authorize the retention of business consultants, which required several signatures to approve the retention of, and payment to, business consultants, Alcatel employees often violated that policy. In numerous instances, Alcatel officials responsible for reviewing due diligence reports on consultants failed to conduct any review of the documents or could not read the language in which the documents were written. Alcatel employees also entered into agreements retroactively and obscured the amounts paid to business consultants by splitting the payments among separate
agreements (to conceal the high commissions Alcatel paid). Finally, Alcatel Standard's due diligence on business consultants was inadequate, and Alcatel CIT often paid business consultants without adequate proof of services rendered. Alcatel CIT failed to establish robust controls over cash disbursements, allowed manual payments without documentation, and Alcatel's FCPA compliance function was understaffed and lacked independence. Alcatel also failed to conduct thorough anti-bribery and corruption training."

Without admitting or denying the SEC's allegations, Alcatel agreed to an injunction prohibiting future FCPA violations and agreed to pay disgorgement of $45.372 million.

In a relese (here), Robert Khuzami (Director of the SEC's enforcement division) stated as follows. "“Alcatel and its subsidiaries failed to detect or investigate numerous red flags suggesting their employees were directing sham consultants to provide gifts and payments to foreign government officials to illegally win business. Alcatel’s bribery scheme was the product of a lax corporate control environment at the company.” Glenn Gordon (Associate Director of Enforcement in the SEC's Miami office) added, "the serious sanctions Alcatel has agreed to, including paying back all net profits made on the contracts Alcatel illegally obtained, should serve as a reminder that we are committed to enforcing the FCPA and a level playing field for companies seeking to obtain or retain business in other countries.”

In a company press release (here), Steve Reynolds, Alcatel-Lucent General Counsel, stated as follow. "We take responsibility for and regret what happened and have implemented policies and procedures to prevent these violations from happening again. The violations largely occurred prior to the merger of Alcatel and Lucent Technologies and involved improper activities in several countries. These settlements resolve the company’s FCPA liability with the DOJ and SEC. We are pleased to have reached these settlements and look forward to putting these matters behind us. Alcatel-Lucent, created as a result of the merger of Alcatel and Lucent Technologies at the end of 2006, is a radically different company today: It has different management, including a new CEO, a new executive committee and a different Board of Directors; It has a zero-tolerance policy regarding bribery and corruption and has a system in place with strong processes and Internet-based and live training designed to prevent these types of situations in all aspects of our business; and as the first in its industry to do so, Alcatel-Lucent announced in 2008 that it would terminate the use of sales agents and consultants -- the primary means by which certain former employees made the improper payments involved in the violations described in the DOJ and SEC settlement papers.”

Martin Weinstein (here) of Willkie Farr & Gallagher represented the Alcatel entities.

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DOJ Charges Two Executives In Hondutel Matter

In April 2009, Latin Node, Inc. ("Latin Node"), a privately-held telecommunication services company headquartered in Miami, pleaded guilty to violating the FCPA's anti-bribery provisions in connection with improper payments made to "foreign officials" in Honduras and Yemen. (See here). The criminal information (here) details Latin Node's efforts to obtain and retain business with Hondutel (the Honduran government-owned telecommunications company).

Yesterday, the DOJ announced (see here) the unsealing of a 19 count criminal indictment against Jorge Granados and Manuel Caceres.

According to the indictment (here), Granados "was the founder, Chief Executive Officer and Chairman of the Board of Latin Node" between 1999 and 2007. During this time period, Granados, a U.S. citizen, had authority to set company policy, contract with telecommunications companies, hire and fire employees, set sales prices, and approve sales practices in foreign countries." Caceres was a senior executive of Latin Node from 2004 to 2007, holding such titles as Vice President of Business Development. The indictment alleges that Caceres, a citizen of Honduras and a lawful permanent resident of the U.S., was responsible for, among other things, developing Latin Node's business in Honduras.

The indictment centers on an "interconnection agreement" between Latin Node and Hondutel "the wholly state-owned telecommunications authority in Honduras, established under Honduran law and headquartered in Tegucigalpa, Honduras." According to the indictment, Hondutel's operations "were overseen by another Honduran government entity, Comision Nacional de Telecomunicaciones."

According to the indictment, "almost immediately after winning the interconnection agreement with Hondutel, Latin Node executives realized that Latin Node needed to obtain a reduction in the Termination Rates in order to be more competitive in the Honduran telecommunications market." The indictment charges that "Latin Node executives also learned that Official 1 [a senior Hondutel executive with broad decision-making authority and influence over telecommunications contracts with private service providers] was considering whether to rescind Hondutel's interconnection agreement with Latin Node."

The indictment charges one count of conspiracy to violate the FCPA's anti-bribery provisions, twelve counts of FCPA anti-bribery violations, one count of money laundering conspiracy, and five counts of money laundering.

According to the indictment, the "purpose of the conspiracy was to obtain from Hondutel business advantages for Latin Node including, but not limited to, preferred telecommunications rates, retaining the interconnection agreement, and continued operation in Honduras despite late payments to Hondutel, by paying bribes to Honduran government officials, including to officers and employees of the Government of Honduras and of Hondutel ...".

Among other things, the indictment alleges that Granados and Caceres, and others, "would and did offer to pay, promise to pay, and authorize the payments of bribes, directly and indirectly to and for the benefit of Official 1, Official 2 [an attorney in the Hondutel legal department who worked directly for Official 1], and Official 3 [a Minister in the Honduran Government who was a member of Hondutel's Board of Directors], in exchange for these Officials' agreements to secure lower rates and other benefits for Latin Node under the interconnection agreement with Hondutel." The indictment charges that Granados and Caceres, and others, "would and did wire and cause to be wired certain bribe payments from Latin Node's bank accounts in Miami-Dade County, Florida, to the bank accounts designated by Official 1, Official 2 and Official 3."

According to the DOJ release, "between September 2006 and June 2007, the defendants allegedly paid more than $500,000 in brobes to the officials, concealing many of the payments by laundering the money through Latin Node subsidiaries in Guatemala and to accounts in Honduras controlled by the Honduran government officials."

As noted in the DOJ release, in early 2007, eLandia International Inc., (here) announced an agreement to acquire Latin Node." "The indictment alleges that the defendants took additional measures to conceal the illicit payments during the acquisition due diligence process."

The DOJ release further notes that the April 2009 resolution with Latin Node resulted from the "actions of eLandia in disclosing potential FCPA violations to the department after eLandia's acquisition of Latin Node and discovery of the improper payments."

***

Did the Latin Node enforcement action contribute to a coup? That is the question asked in this interesting piece by Gregory Paw (Pepper Hamilton).

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The SFO Speaks

Today's post is devoted to the U.K. Serious Fraud Office (SFO), specificaly a recent speech by Richard Alderman (Director of the SFO) on the Bribery Act and a recent webcast delivered by Vivian Robinson QC (General Counsel for the SFO) on the Bribery Act.

Bribery Act 2010 - A New Beginning

Earlier this week, Alderman gave a speech "Bribery Act 2010 - A New Beginning" (see here).

[See here for my recent Q&A with Mr. Alderman on the Bribery Act and other topics].

Below are some excerpted highlights.

"Those corporates and individuals that ignore recent developments in this jurisdiction concerning bribery legislation and the enforcement of the law do so very much at their peril. The UK will soon have the toughest bribery legislation in the world and it will be vigorously enforced by the Serious Fraud Office. In the meanwhile, the work of the SFO in enforcing the current law has been widely praised. Indeed as a result of what we have been doing the OECD, Transparency International and TRACE International have put the UK very much in the lead after the US in enforcing anti-corruption legislation. I have been very pleased to see this. The UK is regarded as an active enforcer of bribery legislation. This is exactly where we need to be."

"We want to encourage corporates that identify a problem to come and talk to us at an early stage. The incentive for them is that a self report could potentially lead to a civil resolution through a Civil Recovery Order. We have done this in two cases that are in the public domain and we currently have some other cases that are being dealt with in this way." [Those two cases are Balfour Beatty Plc (here) and AMEC Plc (here)]

"The sentencing remarks by Lord Justice Thomas in the Innospec case [see here for a prior post] have been regarded as casting some doubt on this. In that case, Lord Justice Thomas stressed the importance of dealing with corruption and the need for very significant sentences when individuals and corporates are brought before the Criminal Courts. He also discussed civil recovery and said that the public would expect suitable cases of corruption to go to the Criminal Courts. I entirely accept this guidance. There will be cases where we shall decide, in accordance with the Code for Crown Prosecutors and the Guidance for Corporate Prosecutions, which because of the nature and seriousness of what is alleged we must prosecute. For example, it is likely that cases involving systemic failings at Board level would be prosecuted. However, there maybe cases where we are unable to prosecute and we consider that a civil recovery order is appropriate. This is a civil remedy. We have given detailed guidance on these issues in the context of corporate prosecutions. There is also Attorney General's guidance on the Use of Civil Recovery."

"While I am talking about guidance from the courts, let me also refer briefly to the comments in the Innospec and Dougall cases concerning documents agreed by the SFO and the corporate when a case comes to a criminal court. The Judge took the view that the SFO had gone too far in these cases in recommending or commenting on the sentence that the Judge should impose. I accept these criticisms. Plea negotiations of this nature are new and there is a lot for us all to learn. We have had other cases where the Judge has been satisfied with the agreed documentation as a basis for sentence. This is what we shall need to aspire to in all of these cases."

"Let me now turn to the subject of the Bribery Act because there are a number of issues here that I would like to talk you through. First of all, I very much welcome the Bribery Act. The SFO has been working with colleagues in Government on proposals for changes in the legislation for a number of years and I am delighted to see the Bribery Act. It is a very tough piece of legislation. It is tougher than the FCPA because it also deals with private sector bribery as well as bribery of public officials and it gives no exemption for small facilitation payments. So it is a tough piece of legislation."

"The offence at the corporate level that you will need to know all about is the provision that makes it an offence for a corporate if it fails to prevent bribery. There is a defence to this if the corporate had adequate procedures to prevent bribery."

"I have heard some people say that this offence is one of strict liability. I do not agree. No offence will have been committed if there were adequate procedures. I have also heard people say that the fact of bribery might mean that there were inadequate procedures by definition and so the defence can never be made out. Again, I do not agree. In the real world there may be occasional lapses despite adequate procedures rigorously enforced. The issue ultimately for the Judge and jury (and for the SFO in deciding on a prosecution) will be - were those procedures adequate?"

"I have mentioned the corporate offence but, of course, the Act goes wider that. There are offences of giving and receiving bribes and there is an offence of bribing a foreign public official. There is also an offence targeted at senior officers of a corporate who consent to, or connive at, bribery."

"The Act also looks at issues of jurisdiction. For the first time non UK corporates will be brought within the jurisdiction of the SFO if they have some business presence in the UK. What this will mean is that a foreign corporate that is involved in corruption anywhere in the world will be within the SFO's jurisdiction if it has a business presence here even if the corruption has no connection with that business presence. This is a very important provision for us. I believe that foreign corporates are waking up to the significance of this."

"Let me comment on two particular issues arising from the Bribery Act because I know that they have caused a lot of concern to the corporate sector. These issues concern promotional expenditure and small facilitation payments. It may be helpful if I comment on both of those issues. In doing this I shall follow an important speech given by the UK's Attorney General, The Rt Honourable Dominic Grieve QC MP, to the World Bribery Forum on 14 September. [See here for my coverage of these remarks]. This speech is available on the Attorney General's website and is particularly important."

"First of all promotional expenditure. There are some who have said that the effect of the Bribery Act is to outlaw all promotional expenditure. I do not agree. Sensible, proportionate expenditure is not unlawful under the Act. But, of course, once the expenditure starts to be on a more lavish scale and is intended to influence decision makers in awarding contracts, then we do get into the area of criminal offences. The Act seems to me to take a very sensible approach. And so the message from me is that sensible proportionate promotional expenditure remains perfectly lawful."

"The other issue that causes difficulty concerns small facilitation payments. I appreciate the difficulties because of the realities of doing business in many parts of the world. I also bear in mind that the US Foreign Corrupt Practices Act exempts these payments from criminal offences in certain circumstances."

"There is a lot of focus on small facilitation payments these days. Just before Christmas the OECD published a paper talking about the corrosive impact that these payments have on societies and calling on Governments to take more vigorous action in order to penalise them. This is an important message to all of us."

"Let us be clear. Small facilitation payments are bribes and they are unlawful under our current law. That will not change and they will be unlawful under the Bribery Act. Nevertheless, I have said in public that the chances of the SFO prosecuting a small (say $50) one off facilitation payment that is picked up and remedied by a corporate's internal processes are remote. That does not mean though that corporates can decide that it is acceptable to have a number of so called one off payments provided that in total they do not exceed shall we say $20 million a year. That is certainly a view that has been put to me. I said that I strongly disagreed. I also said that I could not understand how payments amounting to $20 million a year could be regarded as small one off facilitation payments. They are a course of business that is approved by the corporate. The chances of a criminal investigation and prosecution, where that is company policy, would be high."

"There are two other points I would like to make."

"First, do not under-estimate the scale of the co-operation between the SFO and law enforcement authorities in other countries. This is very extensive particularly with my colleagues in the US Department of Justice but also with other countries such as Australia. It is something that means a lot to us. We discuss cases, intelligence leads, policies and risks. There is a lot of discussion that goes on behind the scenes."

"Finally, there is an invitation from the SFO to approach us to discuss these issues, either directly or through professional advisers. We can discuss your company's policies and we can discuss the issues that you are finding in practice. We find this very beneficial ourselves and I know that corporates do as well. We are very ready to have these discussions with you."

Bribery Act - What Does it Mean?

In a 30 minute webcast (here) Robinson speaks on a variety of topics.

Among other things:

Robinson says that it is right to describe the Bribery Act as the most "draconian" anti-corruption measure in the world.

As to the adequate procedures defense, Robinson says that because of the defense "there is every reason to be optimistic that we won't get as a result of the Act and this particular section a huge expanse in the number of prosecutions of corporates."

As to self-reporting, Robinson says that the SFO will not sit back and wait for cases to come to it. He mentions that there is increased information sharing, greater cross-border cooperation, that the SFO's investigations have dramatically increased, and that more information is coming from whistleblowers. He stated that "companies are at greater risk than ever before that SFO will discover matters on its own." He stated that "self-reporting makes absolute sense [and that the SFO is] encouraging it as strongly as we possibly can."

As to small to medium size companies, Robinson says that smaller organizations are not absolved from liability under the Bribery Act. but that the SFO "would not expect the same from a small or medium size company that we would expect from one of the larger ones." He said that the SFO will take "into consideration the extent to which a small, medium size operation can put in place the same sort of procedures as a larger organiztion with much greater resources." As to due diligence, Robinson says that small to medium size companies "should carry out as much due dilignce as they reasonably can, but what they reasonably can do in that way may not be as much as a large corporate can reasonably be expected to do."

*****

A good weekend to all.

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Friday Roundup

Writer's cramp at the DOJ, the well fed U.K. Ministry of Defence officials, and a potential cost-savings due diligence tool ... it's all here in the Friday roundup.

Writer's Cramp at the DOJ?

When Charles Paul Edward Jumet was sentenced in April to 87 months in prison for FCPA and related offenses, the DOJ issued a press release the same day (see here).

When John Warwick was sentenced in June to 37 months in prison for conspiracy to violate the FCPA, the DOJ issued a press release the same day (see here).

When Juan Diaz was sentenced in July to 57 months in prison for conspiracy to violate the FCPA, the DOJ issued ... you got it ... a press release the same day (see here).

All three instances represented, in FCPA terms at least, a harsh sentence.

So what happens when a sentencing judge rejects the DOJ's ten year sentencing recommendation and instead sentences the defendants to six months in prison?

Well, let's just say that the DOJ appears to have experienced a sudden case of writer's cramp.

As indicated in this prior post, on August 12th, U.S. District Court Judge George Wu of the Central District of California rejected the DOJ's requested ten year prison sentence for Gerald and Patricia Green and sentenced the couple to six months in prison.

It's not like the DOJ hasn't been issuing press releases throughout this case (see here and here), but apparently when a judge materially disagrees with the DOJ, it is time to stop the presses.

Or perhaps it was a mere oversight in which case the DOJ will soon issue a release.

Well Fed U.K. Ministry of Defence Officials

The Guardian recently ran a story that caught my eye.

Written by Rob Evans, the article (see here) details how BAE Systems "regularly wined and dined mandarins and senior military officers."

The article also claims that BAE Systems "frequently gives jobs to politicians and civil servants in a 'revolving door' after they have left public service, including officials who negotiated multi-million pound deals with the company" and that "MoD secretly lobbied to end the Serious Fraud Office's investigation into allegations that BAE bribed foreign politicians and officials to secure large contracts."

An MoD spokesman is quoted in the article as saying "It is vital for the MoD to maintain a close relationship with the defence industry to ensure that we have the best equipment for our armed forces. All the meetings are subject to strict guidelines."

Due Diligence Co-Op Programme

I don't often highlight the latest in FCPA compliance services, but Red Flag Group's new offering seemed to make sense to me - plus it is a service that would seem to lead to cost savings for companies.

The ad (here) asks a simple question: "tired of paying full price for the same due diligence report that another company ordered just a few months ago?"

If you answered yes to this question, you may be interested in Red Flag Group's Due Diligence Co-Op Programme, also explained in the ad.

*****

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Outlining Bourke's Appeal

The DOJ recently filed its reply brief (here) in Frederic Bourke's appeal.

A prior post (here) summarized the FCPA related issues in Bourke's brief and this post summarizes the DOJ's reply brief.

The DOJ begins with this paragraph:

"The evidence at trial established that Bourke, a successful entrepreneur and multi-millionaire, knowingly backed rogue investor Viktor Kozeny in a corrupt plan to purchase the state-owned Azerbaijani oil industry, in secret partnership with the president of Azerbaijan, Heydar Aliyev, and his family. The corrupt plan included the payment of bribes to Aliyev and other officials."

The DOJ states - "[a]t some point, Bourke learned about Kozeny’s business success and strategies from a December 1996 Fortune magazine article." The brief states that the article "detailed Kozeny’s insider trading, purchase of state secrets from a government official, and other fraudulent activity." According to the DOJ, "[h]aving read the article and discussed it with his lawyers, Bourke was aware of Kozeny’s questionable business practices; but Bourke was impressed by the outsized profits Kozeny generated in this scheme, and, as Bourke would later tell a prospective investor, Kozeny had not actually been convicted of a crime."

Bourke's trial principally focused on his investments in Oily Rock, a vehicle the government maintains was used to funnel bribe payments to Azerbaijan officials to ensure that the officials would privatize the State Oil Company of the Azerbaijan Republic (SOCAR) in a rigged auction that only the investors, including Bourke, Kozeny and others could win.

The DOJ states that "Bourke made his initial investment in Oily Rock without directing any of his many lawyers to conduct due diligence."

According to the DOJ:

"Bourke’s interest in the investment was motivated by his knowledge of the corrupt arrangement. Because Bourke knew of the payments to Azerbaijani officials, Bourke demonstrated an assured confidence in the success of the privatization, even though most of the investors who were not privy to the details of the conspiracy viewed it as extremely risky. The inherent risk in the investment arose from the fact that the privatization of SOCAR required a presidential decree."

The DOJ nevertheless acknowledges that many others invested, directly or indirectly, in Oily Rock including former U.S. Senator George Mitchell and other individuals, institutional investors and hedge funds, AIG and Columbia University.

Bourke's appellate brief argued that the district court "committed a series of errors that crippled Bourke's mens rea defense."

Below is a summary of Bourke's arguments along with the DOJ's response as set forth in its reply brief.

Bourke

"The district court improperly instructed on conscious avoidance, despite the absence of evidence that Bourke deliberately avoided knowledge of Kozeny's bribes." According to Bourke, this instruction was error "because there was no evidence that Bourke deliberately avoided learning about Kozeny's bribery." Bourke states that the conscious avoidance instruction "was particularly damaging because the government presented evidence and argued that Bourke failed to exercise adequate due diligence, thus exacerbating the risk inherent in the conscious avoidance instruction that the jury would convict for negligence or recklessness.

DOJ

"There was an ample factual basis for a conscious avoidance charge in this case. To be sure, the Government’s principal theory at trial was that Bourke had actual knowledge of the bribery scheme. But the jury easily could have found, in the alternative, that Bourke was aware of a high probability of the existence of corrupt arrangements, yet deliberately avoided confirming that fact. Such a finding would have been supported, by, among other things, the following evidence:

• Bourke was aware of the high level of corruption in Azerbaijan generally.

• Bourke had read a Fortune magazine article that described Kozeny’s reliance on illegal business practices, such as insider trading, purchase of state secrets from a government official, and fraud, to accomplish the goals of a privatization scheme. This article alerted Bourke that there was a high probability that Kozeny’s latest scheme involving Azerbaijan also included corrupt arrangements, such as bribe payments or offers to pay bribes.

• Bourke defended Kozeny by stating that he had not actually been convicted of a crime.

• Bourke expressed concern to other investors and their attorneys that Kozeny and his employees were paying bribes.

• Bourke proposed the formation of separate companies affiliated with Oily Rock and Minaret to shield Bourke and other American investors from liability from any corrupt payments.

• Bourke played a role in coordinating United States medical treatments, combined with tourism and shopping excursions, for Azerbaijani officials.

From these facts, among others, a rational juror could have concluded that Bourke was aware of a high probability of the existence of corrupt arrangements, yet deliberately avoided confirming that fact. Accordingly, Bourke is wrong when he suggests that a conscious avoidance was inappropriate because 'the trial record contains no evidence that Bourke ‘decided not to learn’ about Kozeny’s bribery.' In fact, a conscious avoidance instruction was particularly appropriate in this case, because Bourke’s corporate attorney had actually cautioned him that, if he thought there might be bribes paid, he could not just look the other way."

"Bourke’s assertion that the conscious avoidance instruction allowed the jury to convict on a negligence theory is mistaken. To the contrary, the District Court told the jury that it could not find Bourke guilty merely because he was negligent. The Government did not argue that the jury should convict because Bourke was negligent in failing to ask his lawyers to conduct due diligence. Rather, the Government argued that Bourke refrained from asking his lawyers to conduct due diligence either because he was consciously avoiding learning about the bribes or because he did not want his lawyers to learn the true facts of his corrupt investment."

"In sum, a rational juror could have concluded based on, among other things, Bourke’s close relationship to Kozeny and other co-conspirators, Bourke’s understanding of the Azerbaijan investment and the Azerbaijani government, and Bourke’s previously expressed concerns about Kozeny’s paying of bribes, that Bourke was aware of a high probability that Kozeny was paying bribes but deliberately avoided confirming that fact. Accordingly, the District Court properly instructed the jury on the doctrine of conscious avoidance."

"Even if the District Court erred in instructing the jury on the doctrine of conscious avoidance (and it did not), the error would provide no basis for vacating Bourke’s conviction. This Court has repeatedly ruled that a conscious avoidance instruction is harmless in cases where, as here, there was sufficient evidence of the defendant’s actual knowledge to support the jury’s verdict."

"Moreover, conscious avoidance was not a prominent feature of the Government’s arguments to the jury. Although the Government did refer to evidence of Bourke’s conscious avoidance, the Government’s primary argument was that Bourke had actual knowledge of the bribes."

Bourke

The district court erred in admitting testimony about the due diligence performed by Texas Pacific Group ("TPG"), an investment fund that did not make the same investment as Bourke, because its lawyers advised of the FCPA risk.

According to Bourke, because he knew nothing about their work, their testimony was irrelevant to his state of mind particularly since the results were never shared or communicated with him.

Bourke states that "the government offered the testimony [...] solely as a contrast with the comparatively skimpy inquiry that Bourke and his lawyers performed" and that this testimony "increased the risk, created by the conscious avoidance instruction and heightened by the government's closing, that the jury would convict Bourke based on his negligence or recklessness -- what he should have known, rather than what he actually knew."

Bourke further argues that having admitted the TPG testimony, "the district court should at least have permitted Bourke to present the contrasting testimony" of the head of investments for Columbia University that would have established that "Columbia invested $15 million with Kozeny in Azeri privatization after due diligence comparable to Bourke's."

According to Bourke, this excluded testimony "would have rebutted the government's claim that his lack of due diligence compared to TPG established his culpability."

Bourke argues that "once the district court permitted the government to present TPG's due diligence as a benchmark for measuring [his] inquiry, fairness demanded that [he] be allowed to present the contrasting picture of Columbia's due diligence, which resembled his own."

DOJ

"The testimony of Wheeler and Rossman [individuals who conducted due diligence for potential Oily Rock investor David Bonderman of TPG] was not offered to show Bourke was negligent; the purpose was to show that Kozeny had not concealed evidence of the corrupt arrangements from potential investors in Oily Rock. Given that Bourke was much closer to Kozeny than Bonderman was, this was important circumstantial evidence of Bourke’s knowledge. As such, the testimony was relevant and appropriately admitted by the District Court."

"To conduct due diligence on the Oily Rock investment, at Kozeny’s invitation, Wheeler traveled to Baku with Bourke and several other potential investors; together, they toured Kozeny’s operations and were introduced to Azerbaijani government officials. Based on what she saw during her visit and her assessment that the investment was “risky [in] nature”, Wheeler and Bonderman brought in TPG’s outside counsel, Cleary Gottlieb, to perform due diligence. Rossman testified that, in 1998, he was a Cleary Gottlieb attorney. During that time, he was asked to conduct due diligence on the Oily Rock investment for TPG. As a part of due diligence, Rossman met with Bodmer at Bodmer’s law offices. During this meeting, Bodmer provided Rossman with various documents related to the Oily Rock investment, and Bodmer and Rossman discussed various details regarding the investment, including the involvement of Azerbaijani investors. Based on his review of documents, his understanding of the investment thesis, and Kozeny’s reputation, which he researched from news coverage, Rossman concluded that this proposed investment could violate the FCPA, and he advised his client not to make the investment. TPG did not invest in Oily Rock."

"... Wheeler and Rossman’s testimony was appropriately admitted, because Bourke was exposed at minimum to the same sources of information as Wheeler and Rossman — Wheeler and Bourke took the same factfinding trip to Baku in January 1998, and Rossman, like Bourke, learned of the investment structure from Bodmer. Accordingly, this testimony was probative of Bourke’s knowledge."

"... the District Court’s decision to admit Wheeler and Rossman’s testimony was entirely appropriate. Moreover, given the volume of direct and circumstantial evidence of Bourke’s knowledge of the conspiracy’s objectives, any conceivable error was harmless."

"Bourke also contends that the District Court erred in barring the testimony of Bruce Dresner, who served as Columbia University’s Vice President for Investments in 1998, and, in that capacity, based on representations by Omega’s Clayton Lewis and Leon Cooperman, recommended that Columbia invest $15 million in privatization vouchers through Omega. Bourke complains that, although the Government was permitted to call Wheeler and Rossman to contrast their due diligence with Bourke’s, he was not permitted to contrast his due diligence with Columbia’s. The comparison is inapt. Unlike Wheeler and Rossman, who testified about a potential investment in Oily Rock itself, Columbia University was a potential investor in Omega, which was merely planning to invest alongside Oily Rock. The District Court did not abuse its discretion in excluding this proposed testimony."

"The District Court properly precluded Dresner’s testimony because it was not relevant. As the District Court stated, Dresner’s state of mind “has nothing to do with the defendant on trial.” Unlike other defense witnesses and Government witnesses who were present in Baku with Bourke to consider an investment in Oily Rock and therefore possessed relevant information regarding Bourke’s knowledge, Dresner had no contact with Bourke and was considering investing in Omega, not Oily Rock. Dresner never traveled to Azerbaijan to investigate the investment opportunity, relying instead on the recommendation of Omega. Dresner never met Kozeny, Farrell, or Bodmer — the individuals who discussed the FCPA violations with Bourke."

"In addition, Dresner’s testimony would not have been particularly helpful to Bourke, and therefore any error in excluding the testimony would have been harmless. Notwithstanding Dresner’s exclusion, Bourke offered evidence through several Government and defense witnesses that Columbia University had invested in the same project, and there was no suggestion in any of that testimony or in arguments that Columbia University was aware of bribes or was prosecuted. Thus, Bourke was able to establish that some investors in the Azerbaijani vouchers were not aware of the bribes. Had Dresner actually testified, he would have revealed that Columbia and Bourke were not similarly situated and that Columbia had much less information about the investment than Bourke did."

"In sum, the District Court acted within its discretion in excluding Dresner’s testimony, and this ruling does not warrant a new trial."

Bourke

The district court "refused to instruct that conviction for conspiracy requires the same mens rea as the underlying FCPA offense -- meaning (among other things) a bad purpose to disobey or disregard the law."

According to Bourke, "the district court compounded its error in giving the conscious avoidance instruction by rejecting [his] requested instruction [as to the conspiracy charge] that the government had to prove that he acted corruptly and willfully."

Bourke argued that "when the district court turned to the mens rea required for the conspiracy offense, rather than for a substantive FCPA offense, it omitted the requirement that the defendant act corruptly" and that this "watering-down of the mens rea requirement for the conspiracy charged [...] undermined [his] defense, which rested on his state of mind."

DOJ

"Bourke did not lodge this objection in this District Court, and therefore, this part of the charge is reviewed for plain error. The District Court’s mens rea instruction was correct and was certainly not plainly erroneous."

"The District Court instructed the jury on all the elements of a substantive FCPA violation, including the requirement that the defendant act “willfully” and “corruptly,” terms which the Court defined for the jury."

"The District Court’s charge encompassed the mens rea elements of the FCPA and was not plainly erroneous. The “word ‘corruptly’ in the FCPA signifies . . . a bad or wrongful purpose and an intent to influence a foreign official to misuse his official position. But there is nothing in the word or any thing else in the FCPA that indicates that the government must establish that the defendant in fact knew that his or her conduct violated the FCPA to be guilty.”

"The District Court’s extensive instructions on mens rea included the instruction that Bourke had to act “with the specific intention of furthering [the conspiracy’s] business or objective” and “for the purpose of furthering the illegal undertaking.” It is simply not possible to conspire to act corruptly without acting corruptly."

"Finally, Bourke failed to raise this highly abstract objection during any of the several conferences on the jury charge."

"Accordingly, the charge is subject to review only for plain error. There was no error, much less plain error, in this case."

Bourke

The district court "rejected Bourke's proposed good faith instructions, even though [he] produced ample evidence to warrant the instructions and no other instruction covered the point."

Bourke argued that his proposed instruction "accurately reflected the principle that a defendant's good faith belief that he acted lawfully negates the mens rea for specific intent offenses."

While Bourke concedes that his efforts to investigate the investment "were not as extensive" as others, his efforts "suffice for a good faith instruction." Because the case turned on his state of mind, Bourke states that "there is no doubt that the good faith defense, if accepted by the jury, would have produced an acquittal."

DOJ

"Bourke’s contention is without merit. A separate good faith instruction was not necessary in this case, as the relevant jury instructions effectively communicated the essence of a good faith defense in its discussion of the elements of knowledge and willfulness."

"Indeed, the District Court’s instructions that an FCPA violation required a defendant to act “with a bad purpose to disobey or disregard the law” and that the Government could not meet its burden of proof by showing that the defendant’s actions were the result of “mere negligence or some other innocent explanation” captured the concepts identified in Bourke’s proposed charge — that Bourke could not be convicted of Count One if he believed he “was acting properly in connection with the matters alleged in [Count One], even if he was mistaken in that belief, and even if others were injured by his conduct." [...] Thus, the good faith instructions Bourke requested were “effectively presented elsewhere in the charge.” Accordingly, the District Court’s decision not to deliver a separate good faith charge was appropriate and does not provide a basis for a new trial."

Bourke

"Any one of the errors concerning [his] knowledge of Kozeny's bribes and his specific criminal intent, standing alone, warrants reversal" and if any one error is harmless in isolation, then their "cumulative effect profoundly damaged [his] defense."

DOJ

"Bourke contends correctly that the cumulative effect of errors that are individually harmless can cast doubt upon the fairness of a conviction. For the reasons set forth above, there were no such errors. Accordingly, Bourke’s “cumulative effect” argument provides no basis for granting a new trial."

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Outlining Bourke's Appeal

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https://manufacturing-holdings.blogspot.com/2010/08/outlining-bourke-appeal.html

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