Source: https://www.wwhgd.com/newsroom-news-133.html
Timestamp: 2020-06-06 00:30:53
Document Index: 261212321

Matched Legal Cases: ['in fine', 'in fine', 'in fine', '§ 78', '§ 78', '§ 78', '§ 78']

George Anthony Smith, Esq.
From Bonds to Clemens to McGwire, many of baseball’s giants climbed the ladder of success and fell back down again amidst allegations of illegal steroid use. What may have seemed like a fast way to get ahead turned into a quick way to be embarrassed and vilified. Likewise, many corporate giants desiring to do work in or with foreign countries historically have used another form of cheating – bribery of foreign officials – to outscore their competitors. The Department of Justice (“DOJ”) and the Securities and Exchange Commission (“SEC”) are working to level the playing field, however, by utilizing the Foreign Corrupt Practices Act (“FCPA” or “Act”) to severely punish corporations and their employees for bribing foreign officials to gain preferential treatment. The number of FCPA prosecutions has dramatically increased in recent years, forcing corporations around the world to make conscious decisions to self-regulate their own methods of doing business. However, it is not only the corporate giants who are being targeted by the DOJ and SEC. Indeed, the first wave of government attacks under the 35-year-old Act – the easy kills – is waning. The next phase promises to include medium- and smaller-sized entities and individuals that are now on solid notice that they had better get their houses in order. And, at the same time, the authorities have created a prescribed series of sometimes complex requirements a company should institute to accomplish that task. This article proposes to highlight recent FCPA prosecutions, to demonstrate the Act’s broad enforcement and rigorous penalties, and to provide tips on achieving compliance and avoiding prosecution.
To over simplify, the FCPA prohibits two things: (1) bribery of foreign officials in return for business; and (2) failure to maintain adequate books and records.[1] In essence, the statute says: “Do not bribe, but if you do, you had better list it as a bribe in your financial records.” The scope of enforcement of the statute is very broad (for example, with respect to the government’s interpretation of terms like “persons,” “officials,” and “bribes”), and recent prosecutions under the Act demonstrate just how broadly the statutory mandates and definitions of terms are now being interpreted.
Despite a growing number of FCPA prosecutions against foreign companies, a misconception still exists that the FCPA is strictly a U.S. concern. Originally, the FCPA was aimed at curbing corrupt business practices by U.S. companies, including businesses that traded securities in the United States. The FCPA was enacted in 1977 after SEC investigations revealed that over 400 U.S. companies had made questionable payments totaling $300 million to foreign officials to gain business. In 1998, however, the U.S. increased the FCPA’s jurisdictional reach, adding penalties for any persons (even foreign corporations and nationals) who performed acts within the U.S. that furthered corrupt payments to foreign officials.[2] Today, in truth, the Act applies to any company or person, including foreign ones, that issues stock in the U.S. or performs any actions in the U.S. to further bribes elsewhere. Recent prosecutions emphasize these points.
Siemens and ITT
In one of the most highly publicized and costly prosecutions to date, Siemens AG paid $800 million in civil and criminal fines to the DOJ and SEC for corrupt payments occurring around the world. Siemens had made 4,238 separate bribes totaling approximately $1.4 billion to numerous foreign officials to gain contract work. Siemens’ bribes included payments on transactions to design and build metro transit lines in Venezuela, metro trains and signaling devices in China, power plants in Israel, high voltage transmission lines in China, traffic control systems in Russia, refineries in Mexico, and national identity cards in Argentina (to name a few). The company even had “cash desks” containing thousands of U.S. dollars which could be conveniently stuffed in a suitcase and carried to a corrupt foreign official.[3] According to the SEC, for Siemens, “bribery was nothing less than standard operating procedure.”[4]
The SEC and DOJ prosecuted Siemens AG, Siemens Argentina, Siemens Venezuela, and Siemens Bangladesh. All companies were subject to the jurisdiction of the FCPA. Siemens AG was subject to prosecution in the U.S. because it sold securities within the United States. But, the three Siemens subsidiaries are foreign companies, headquartered in other nations. The subsidiaries’ only connections with the U.S. were meetings held in the U.S. in which improper payments were discussed, and U.S. bank accounts were used to facilitate improper payments. The DOJ determined that these rather tenuous connections constituted actions within the U.S. that furthered bribes in other nations, warranting prosecution of the foreign companies. This case makes clear that if a company performs an action – even a minor one – within the U.S., and that action furthers corruption outside the U.S., the company is risking FCPA prosecutions.
A parent company can be prosecuted for FCPA violations committed by its foreign subsidiaries even if the foreign subsidiary is not subject to the FCPA’s jurisdiction. Two cases demonstrate that the DOJ and SEC will not hesitate to prosecute a parent company for its foreign subsidiary’s FCPA violations when the foreign subsidiary’s books are combined with the parent company’s financial reports. Siemens AG, for example, had to pay $1.5 million for its foreign subsidiaries’ FCPA violations because Siemens AG failed to report its subsidiaries’ violations to U.S. authorities and accounted profits from the violations in its financial reports.[5] Similarly, ITT Corporation (“ITT”) paid $1.5 million in fines for its wholly-owned Chinese subsidiary’s bribery of foreign officials. The Chinese subsidiary made payments both directly and indirectly through third-parties to employees of state-owned companies. In return for money, the employees recommended the subsidiary’s water valves for the state-owned companies’ construction projects. The profits from the illicit payments and the payments themselves were disguised by the Chinese subsidiary in financial reports that were consolidated on ITT’s financial records. The DOJ prosecuted ITT for misrepresenting financial reports and failing to regulate financial transactions within its corporation.[6]
A more recent investigation and subsequent settlement with international automaker Daimler AG represents one of the most wide-ranging cases brought so far against a foreign corporation. In early 2010, Daimler AG, a German corporation, entered into an agreement with the DOJ and SEC to pay $185 million in fines. Two Daimler AG subsidiaries agreed to accept guilty pleas in an effort to bring closure to a U.S. investigation started in 2004 regarding alleged violations of the FCPA related to the company’s worldwide sales practices. The final settlements were approved at a hearing before Judge Richard J. Leon in the U.S. District Court for the District of Columbia on April 1, 2010.
According to papers filed in federal court in Washington, in Daimler AG’s portion of the settlement, the automaker agreed to pay a $93.6 million fine to settle the DOJ criminal probe and $91.4 million to the SEC.[7] The SEC case against Daimler alleged that the company made bribes of nearly $56 million related to more than 200 transactions in 22 countries that earned the company at least $90 million in illegal profits. Daimler was also accused of violating the terms of the United Nations oil-for-food program with Iraq by giving kickbacks of 10 percent of the value of contracts to the Iraqi government. The company allegedly earned more than $4 million from the sale of vehicles and spare parts.[8]
While it did not plead guilty to any charge as part of the deal, Daimler AG signed a two-year deferred prosecution agreement and will be evaluated by an independent corporate monitor for three years. A Chinese subsidiary of the automaker will also be subject to the deferred prosecution agreement to avoid guilty pleas.[9]
The SEC alleged that the corruption within Daimler AG was so pervasive that it extended beyond the scope of the sales organization into internal audit, legal and finance departments. Two Daimler AG subsidiaries, based in Russia and Germany, entered separate guilty pleas as part of the settlement. DaimlerChrysler Russia SAO agreed to plead guilty (1) to conspiring to violate the FCPA and (2) violating its anti-bribery provisions, according to a separate plea agreement.[10] Daimler Export and Trade Finance GmbH agreed to plead guilty to the same charges.[11]
Tyson Foods, one of the largest poultry producers in the world, acquired a Mexican subsidiary operation, which included at least one chicken plant. Later, Tyson's management learned that, between 2004 and 2006, the subsidiary had paid approximately $90,000 to government veterinary inspectors, who were inspecting chicken plants to certify that the chickens met health and safety standards for export. The bribes were paid to prevent the inspectors from disrupting business, and some payments were made to the inspectors’ spouses as well.
After learning of the bribery, Tyson's management in the U.S. challenged its subsidiary to cease making the payments. However, the practice continued for another two years because the inspectors threatened delays in shipments. Still later, Tyson's law department finally brought an end to the practice.
Tyson made a voluntary disclosure to the U.S. Department of Justice, and in 2011, the DOJ and SEC agreed to enter into a two-year deferred prosecution agreement. The agreement required Tyson to: (1) pay $5.2 million ($4 million of which were criminal fines, and $1.2 million of which were disgorgement and interest); and (2) establish a robust compliance program.
In December 2011, Magyar Telekom plc., a Hungarian telecommunications company, and Deutsche Telekom AG, a German telecommunications company and majority owner of Magyar Telekom, agreed to pay a combined $63.9 million criminal penalty to resolve an FCPA investigation conducted by the DOJ. The DOJ filed a criminal information against Magyar Telekom and a two-year deferred prosecution agreement in the Federal District Court for the Eastern District of Virginia. As part of the deal, Magyar agreed to (1) pay a $59.6 million penalty, (2) implement an enhanced compliance program, and (3) submit annual reports regarding its efforts in implementing the enhanced compliance measures and remediating past problems. Allegedly, Magyar’s executives lobbied Macedonian government officials to prevent the implementation of new telecommunication laws and regulations that Magyar deemed detrimental to its Macedonian subsidiary. Further, Magyar representatives allegedly falsified books and records in regards to the company’s activities in Montenegro.
The DOJ entered a two-year deferred prosecution agreement with Magyar Telekom’s parent company, Deutsche Telekom, for its alleged failure to keep books and records that accurately detailed the activities of Magyar Telekom. Deutsche Telekom agreed to (1) pay a $4.36 million penalty in connection with the inaccurate books and records, and (2) enhance its compliance program. In a related matter, the SEC announced civil charges against Magyar and Deutsche Telekom as well as three former Magyar Telecom executives. Magyar Telekom and Deutsche Telekom consented to the entry of a permanent injunction against FCPA violations, and Magyar Telecom agreed to pay $31.2 million in disgorgement and prejudgment interest.[12]
Despite an impressive track record of successful corporate prosecutions, in the government’s view, this was not enough. At an event sponsored by the American Bar Association in September 2008, the DOJ's chief FCPA prosecutor, Mark Mendelsohn, told those in attendance:
The number of individual prosecutions has risen – and that’s not an accident . . . . It is our view that to have a credible deterrent effect, people have to go to jail.[13]
And, as it turned out, Mr. Mendelsohn’s promise was not a hollow one. Indictments of individuals for FCPA violations climbed from six in 2006 to 48 in 2010. In recent years, the DOJ and SEC have prosecuted executive officers, finance directors, and other bribe facilitators even after they entered into settlements with the individuals’ former employers. For example, on May 29, 2009, Thomas Wurzel, the former President of ACL Technologies, accepted a settlement agreement with the SEC for his role in authorizing illicit payments to Egyptian Air Force officials. Wurzel consented to pay a $35,000 civil penalty.[14]
The penalties can be much worse. For instance, two citizens of the United Kingdom, Jeffrey Tesler and Wojciech Chodan, were extradited to the U.S. and indicted on February 17, 2009, with one count of conspiracy to violate the FCPA and ten counts of violating the FCPA. The indictment alleged that two corporations, one which employed Chodan, hired Tesler to bribe lower level Nigerian government officials. The indictment also alleged that the corporations entered faux contracts with Tesler, paying his company $132 million which Tesler used to bribe the Nigerian officials.[15]
In April 2012, Jack Stanley, who pled guilty in 2008 to two counts of conspiracy to violate the FCPA and to commit mail and wire fraud, began his 2-1/2 year prison sentence at a low-medium security federal prison in Arkansas. Stanley was the CEO and chairman of the board of Kellogg Brown & Root, which was also involved in the Nigerian bribery scheme.
On December 13, 2011, the DOJ and the SEC announced FCPA charges against seven former executives and two former third-party agents of the corporation Siemens AG, stemming from actions covered in the DOJ’s 2008 FCPA settlement. Allegedly, the individual defendants participated in a decade-long scheme in which they provided more than $100 million in bribes to Argentinian officials in order to secure a $1 billion contract to produce national identity cards for every Argentinian citizen. Bernd Regendantz was theonly former Siemens employee that decided to settle the charges and agreed to pay a $40,000 civil penalty to the SEC. According to the indictment, eight other individuals with ties to Siemens are being charged with (1) conspiracy to violate the FCPA and the wire-fraud statute, (2) money laundering conspiracy and (3) wire fraud.[16]
While not every convicted person faces these extreme criminal penalties, the DOJ and SEC are sending out a loud and clear message that they will seek harsh punishments for anyone involved in bribing foreign officials. Their message recognizes that prosecuting only companies does not achieve the desired result, as companies can pay fines as a cost of doing business. Only the threat of individuals spending time in federal penitentiaries will squelch the tide of corruption.
Moreover, the bribed “foreign officials” do not have to be high-ranking government officers but may be low-level government employees. The FCPA broadly defines “foreign official” as including “any officer or employee of a foreign government or any department, agency, or instrumentality thereof . . . or any person acting in an official capacity for or on behalf of any such government or department, agency, or instrumentality.”[17] The Tyson case, above, also demonstrates this point, where fairly low-level government inspectors were being bribed.
Thus, a person may be a foreign official if he or she wins an election, is appointed to a government agency, or is merely employed by an instrumentality of the government. “Instrumentalities,” while undefined by the Act, clearly encompass state-owned enterprises. In 2011, two district courts in California concluded that payments to state-owned enterprises for the purposes of securing business may subject a company to both civil and criminal liability.[18] In 2009, ITT was prosecuted for its subsidiary’s payments to low-ranking employees of a Chinese government-run business.[19] To avoid prosecutions, it is imperative that companies recognize that “foreign officials” means much more than elected leaders. This is especially true in regions like Asia and the Middle East, where the governments’ rulers often have direct influence on businesses’ operations.
The definitions of “foreign official” and “instrumentality” have a direct bearing on the currently pending case involving Control Components, Inc. ("CCI"), pending in the U.S. District Court for the Central District of California. There, prosecutors have charged company executives with 16 counts of paying bribes to state-owned companies in countries including China, South Korea, Malaysia and the United Arab Emirates. Defendants have argued for dismissal, saying (1) that nothing in the FCPA indicated that it was originally intended for state-owned enterprises to be included within the purview of the Act, and (2) that the defendants had no notice that would lead them to believe officials of state-owned companies were to be considered equivalent to government employees. In early May 2011, the judge in the case issued a preliminary ruling stating that whether a company is a government “instrumentality” is a question of fact for the jury to decide. On September 2, 2011, the federal district judge issued a tentative ruling which, for the most part, adopted the Government's proposed seven-factor test for determining whether the alleged recipients of a bribe worked for an instrumentality of a foreign government. The judge, however, refused to embrace a bright-line approach and ruled that the jury may consider seven non-exclusive factors:
1. the circumstances surrounding the entity’s creation;
2. the foreign government’s characterization of the entity, and whether the entity is widely perceived and understood to be performing official (i.e., governmental) functions;
3. the degree of the foreign government’s control over the entity, including the foreign government’s power to appoint key directors or officers of the entity;
4. the purpose of the entity’s activities, including whether the entity provides a service to the citizens of the jurisdiction;
5. the entity’s obligations and privileges under the foreign country’s law, including whether the entity exercises exclusive or controlling power to administer its designated functions;
6. the status of the employees under the foreign government’s law, including whether the employees are considered public employees or civil servants; and
7. the extent of the foreign government’s ownership of the entity, including the level of financial support by the foreign government (e.g., subsidies, special tax treatment, and loans).[20]
On September 20, 2011, Judge James Selna denied the defendants’ motion to dismiss and the case is set to go to trial in June 2012. (See further discussion of CCI case below at p. 10.)
Additionally, “bribes” are not limited to a cash-stuffed suitcase and large monetary payments. While certainly handing a cash-stuffed suitcase to a foreign official is likely an FCPA violation, the FCPA criminalizes much more. The FCPA prohibits corporations from corruptly giving foreign officials “anything of value” in return for business.[21] Enforcement actions reveal that “anything of value” has a broad interpretation, including things like vacations, airfare, perfume, gift certificates, condo time shares, and jewelry.[22] For example, in 2007 the SEC brought an enforcement action against Lucent Technologies, Inc. (“Lucent”) based exclusively on excessive travel and marketing expenses.[23] The complaint alleged that Lucent, a wholly-owned subsidiary of French company Alcatel-Lucent, spent in excess of $10 million funding visits to the U.S. for Chinese foreign officials. The officials visited U.S. destinations from Hawaii to New York City. The trips occasionally involved some opportunity to inspect Lucent’s factories or receive training, but a disproportionate amount of time was spent on non-business activities like sightseeing and other entertainment and leisure activities. These facts culminated in a settlement wherein Lucent agreed to pay $1.5 million in civil penalties and $1 million to the DOJ pursuant to a non-prosecution agreement.[24] The plane tickets and entertainment passes constituted “bribes” which landed Lucent in court suffering an FCPA prosecution.
Violating the FCPA can result in huge civil and criminal fines, civil suits, and global embarrassment. SEC Chairman Mary L. Schapiro recently warned corporations around the world that “any company that seeks to put greed ahead of the law by making illegal payments to win business should beware that [law enforcement agencies] are working vigorously across borders to detect and punish such illicit conduct.”[25] Their work has paid off. The past two years have been two of the biggest in FCPA enforcement history, both in the number of prosecutions and strength of penalties. The SEC and DOJ are waging the war against corrupt business practices with big weapons and jaw-dropping fines: Siemens AG forked over $800 million for civil and criminal fines; Halliburton and Kellogg Brown & Root (KBR) disgorged $177 million to the SEC; KBR delivered another $402 million to the DOJ; and Novo Nordisk A/S coughed up $19 million for fines. The list goes on, and the message is consistent: “FCPA violations have been and will continue to be dealt with severely by the SEC and other law enforcement agencies.”[26]
More bad news for violators: paying the large SEC and DOJ fines does not necessarily end the company’s exposure. A more subtle, yet also potent penalty awaits companies after the onslaught of civil and criminal fines. Private actions by infuriated stockholders and businessmen have been filed with increasing frequency following exposure of a company’s fraudulent business practices. The FCPA itself does not create a private cause of action.[27] But, the allegations underlying an FCPA prosecution can form the basis for other private causes of action. For example, in three recent cases shareholders filed actions alleging securities fraud immediately following a company’s announcement of potential FCPA violations.[28] The complaints alleged that prior corporate statements on finances were materially false based on the fraudulent business practices. The court upheld the complaints on motions to dismiss by the defendants.
Thus far, a handful of companies have settled their cases, the largest for $185 million in fines. One company was recently convicted at trial, and other cases are pending. In addition to securities fraud, private actions have been filed alleging breach of fiduciary duty, breach of contract and RICO violations.[29] While defendants undoubtedly have and will continue to prevail in some of these actions, the companies will still suffer the pain, expense and negative publicity of defending a civil action, on top of paying large civil and criminal fines to the U.S. Government.
During the first half of 2011, new milestones were reached regarding FCPA implementation and enforcement, including the first-ever instance of a company being tried and convicted on FCPA violations. In May 2011, a federal jury in the United States District Court for the Central District of California convicted Lindsey Manufacturing Co., its CEO Keith Lindsey and CFO Steve Lee, on six counts of FCPA violations. The jury also convicted Angela Aguilar on one count of conspiracy to launder money. Ms. Aguilar is the wife of Enrique Aguilar, president of Mexican company Grupo International, which worked as a sales agent for Lindsey Manufacturing. Enrique Aguilar was also charged, but remains a fugitive.
In the Lindsey case, allegations against the California-based producer of electricity transmission equipment and its executives included one count of conspiracy to violate the FCPA and five additional counts of FCPA violations. These were related to bribes that were paid to two officials from a state-owned electric utility company in Mexico. Prosecutors alleged that the company hired Enrique Aguilar to bribe officials from the Comision Federal de Electricidad (CFE) in order to secure the company’s business. For seven years after Aguilar was hired, Lindsey Manufacturing sold more than $19 million of equipment to CFE. Aguilar, in turn, received roughly $5.9 million in commissions for his role in securing the sales. That commission was used in part to buy the power company officials a $297,500 Ferrari and a $1.8 million yacht, and to pay more than $170,000 in credit card bills. Defense attorneys alleged that Lindsey executives were not aware that Aguilar was using his commission to bribe the Mexican officials. The trial itself took one month to complete, and the jury deliberated for one day before returning its verdict.
However, the DOJ's victory was short-lived. In December 2011, a federal judge in Los Angeles dismissed the indictments against Keith Lindsey, Steve Lee and their company Lindsey Manufacturing. Judge Howard Matz threw out the verdicts and voiced his disgust with the prosecutors' misconduct:
[I]t is with deep regret that this Court is compelled to find that the Government team allowed a key FBI agent to testify untruthfully before the grand jury, inserted material falsehoods into affidavits submitted to magistrate judges in support of applications for search warrants and seizure warrants, improperly reviewed e-mail communications between one Defendant and her lawyer, recklessly failed to comply with its discovery obligations, posed questions to certain witnesses in violation of the Court’s rulings, engaged in questionable behavior during closing argument and even made misrepresentations to the Court.[30]
Also in 2011, Diageo plc, the world’s largest distilling company, entered into a settlement with the SEC for more than $16 million. The SEC alleged that Diageo’s subsidiaries had made hundreds of small payments to various military officers for the purpose of obtaining business or otherwise securing advantages. These payments were described in two forms: (1) holiday and vacation gifts known as “rice cake payments”; and (2) business development gifts. For these gifts, the allegations were that Diageo had provided many payments during holidays and vacations to military officers who were responsible for procurement of liquor between 2002 and 2006. The payments ranged in value between approximately $100 to $300 per recipient. For the business development payments, several hundred thousand dollars were alleged to have been paid to various officials for the purposes of influencing purchasing decisions.
On May 25, 2011, the SEC commissioners voted to adopt the Dodd-Frank “whistleblower reward and protection rules” that it proposed in 2010. Under the new rules, whistleblowers who provide original information to the SEC that lead to a recovery of $1 million or more in “monetary sanctions,” are entitled to collect between 10 to 30 percent of the total recovery in any action or settlement by the SEC.[31] This includes actions involving FCPA anti-bribery and accounting provisions. The Dodd-Frank whistleblower provisions amend the Securities and Exchange Act of 1934 and apply to all securities laws violations. The provisions may significantly impact compliance and enforcement efforts under the FCPA, which is part of the Securities and Exchange Act.
Critics are concerned that this new rule may prompt individuals to bypass a corporation’s internal reporting system and speak directly to SEC officials.[32] Moreover, private companies should be cautious in taking comfort from the fact that Dodd-Frank’s whistleblower provisions apply only to publicly-traded companies. Most employees do not know that Dodd-Frank only applies to publicly-traded companies, and the attractiveness of a potential reward for disclosing violations to authorities might incentivize employees of any entity to make such reports, even though they end up being ineligible for the money. Of course, by that point, the cat is out of the bag. Further, a company likely faces the spectre of a government inquiry or investigation in any event, without having had the chance to perform its own analysis.
2012 Developments (through April)
In July 2011, DOJ prosecutors sent News Corp., the U.S. parent company of Rupert Murdoch's media empire, a request for information on alleged payments which journalists made to British police officers in return for news tips.[33] Currently, the FBI is conducting an investigation into whether Murdoch’s employees violated the FCPA.[34] It has also been reported that the SEC is conducting inquiries into News Corp.’s use of false names in company records and accounts to disguise the recipients of bribes from journalists.[35] If it is found to have violated the FCPA, News Corp., which is headquartered in New York, could be fined up to $2 million and barred from U.S. government contracts. Further, individuals who participated in the bribery could face fines of up to $100,000 and a jail sentence of five years. However, executives of News Corp. could be liable only if they authorized bribes or knew about the practice but failed to stop it. The FBI is currently reviewing evidence that News Corp. voluntarily handed over to investigators.[36]
Smith & Nephew – the Pharmaceutical and Medical Device Industry
In February 2012, following a 2007 DOJ and SEC investigation, Smith & Nephew, a UK-based medical device maker entered into a settlement agreement with the authorities to pay $22.2 million to resolve FCPA offenses committed by the company’s U.S. and German subsidiaries. The allegations involved the bribery of doctors employed overseas by public hospitals to use and recommend their products. The main country of focus for the bribery was Greece. The settlement entailed a deferred prosecution agreement, which included, among other things, the requirement that Smith & Nephew have a corporate monitor for 18 months.
In addition to Smith & Nephew, the authorities’ investigations into the pharmaceutical and medical device industry include BioMet Inc., Stryker Corp., Zimmer Holdings Inc., Wright Medical, and MedTronic, Inc. For Smith & Nephew, there were numerous red flags that the company failed to address, including an e-mail exchange between company employees and the distributor, in which the distributor admitted paying cash incentives to doctors involved in surgeries. Most significantly, the artifice used by Smith & Nephew, as alleged by the government authorities, was an overseas fund created to pay “marketing fees,” into which the company made cash injections. No such marketing services were ever received, and the fund was used to pay the cash incentives.
Control Components, Inc. ("CCI") designs and manufactures service control valves for the nuclear, oil and gas, and power generation industries. Several officers and directors were indicted in 2009 on charges of paying millions in bribes and providing lavish vacation trips to officials at state-owned companies in, among others, China, South Korea, Malaysia and the UAE. The purpose of the bribes, according to the indictments, was to secure contracts for the company from 1998 to 2007, in violation of the FCPA.
In addition to guilty pleas from the Carsons in April 2012 (see below), several other CCI executive officers have also been indicted, and trials are scheduled for later this year. CCI itself pleaded guilty in 2009 to a three-count criminal indictment which charged it with conspiracy to violate the FCPA and the Travel Act and two substantive violations of the FCPA. It admitted paying $6.8 million in bribes to officers and employees of state-owned companies in 36 countries between 2003 and 2007. It paid an $18.2 million criminal fine. One CCI executive is still a fugitive in South Korea.
Two former executives of CCI became the second husband and wife team convicted of FCPA violations when they pleaded guilty in April 2012 in federal court in Santa Ana, California. Stuart Carson, the former chief executive officer of CCI, and Hong “Rose” Carson, the director of sales for China and Taiwan, were charged in separate indictments with making corrupt payments to foreign officials. Sentencing is scheduled for October 15, 2012. Stuart Carson faces up to ten months in prison and his wife Rose faces up to three years’ probation with six months of home confinement.
On January 16, 2012, after a three-day jury trial, a federal district court judge ordered the acquittal of John O’Shea. O’Shea, the former general manager of the Texas unit of Swedish-Swiss power company ABB, was indicted in 2009 and charged with conspiracy, violations of the FCPA, money laundering, and falsification of records. O’Shea allegedly used a Mexican company as a sales representative for ABB on its contracts with the Comison Federal de Electricidad (“CFE”). A Mexican citizen, who was employed by the Mexican company, allegedly served as a sales representative for foreign and domestic companies doing business with Mexican government agencies. ABB sought contracts with the CFE, an electrical utility company responsible for supplying electricity to most of Mexico. In 1997, CFE awarded a $44 million contract to ABB’s Texas unit to upgrade Mexico’s electrical system. In 2003, CFE awarded another multi-year contract to ABB’s Texas unit for the performance of maintenance and upgrades on the network. Allegedly, to obtain these contracts, O’Shea authorized ABB’s Texas unit to make payments to the CFE using the Mexican company as a go-between and agreed to give CFE officials 10% of the revenue from the contract. In his decision, U.S. District Judge Lynn N. Hughes stated that he found that one of the Government’s most important witnesses, an employee of the Mexican company who was awaiting sentencing on conspiracy charges, could not connect O’Shea to the alleged crimes. The judge found that O’Shea’s conduct could be reasonably explained by lawful motives. Further, the judge expressed concern that while it refused to grant immunity to an important defense witness, the Government had granted immunity to the Mexican company’s founder and allowed him to disclose selective information.
In February 2012, the Obama Administration and the DOJ dropped one of the largest FCPA cases to date. On January 19, 2010, Amaro Goncalves, vice president of sales for Smith and Wesson, was indicted for multiple FCPA violations in a bribery scheme involving the Republic of Goban. The charges were in connection with a massive two-year sting operation run by the FBI arising out of the infamous Shot Show case in Las Vegas. Goncalves, along with twenty-one other executives in the U.S. firearms industry, was alleged to have struck a deal with FBI agents - posing as representatives of the Ministry of Defense of Goban - for a $15 million arms defense contract to outfit the presidential guard. It was also alleged that Goncalves paid a sales agent twenty percent of the inflated contract as commission to obtain the contract. United States v. Goncalves was the first of four scheduled trials involving the sting operation. Of the twenty-two defendants originally charged, three defendants pled guilty, three defendants were acquitted and two defendants received hung jury verdicts.[37] In dropping the charges against the remaining fifteen defendants, prosecutors said they had been hurt by rulings that barred them from introducing evidence about the executive’s prior bad acts.[38] One expert on FCPA law believes that the outcome could prompt other executives accused of bribing foreign officials to fight charges instead of agreeing to settlements or plea bargains.[39]
February was indeed a busy month in terms of FCPA developments. The former chief executive of KBR Inc., Albert “Jack” Stanley, was sentenced to 30 months in prison by a federal district judge for his role in bribing Nigerian government officials in connection with a contract for a natural gas facility. As noted above at p. 5, Stanley began serving his sentence in April 2012. Stanley pled guilty in 2008 to being involved in a scheme that lasted over a decade. It involved funneling over $180 million in bribes to government officials in Nigeria in order to win a $6 billion contract. On the same day in February, the same judge sentenced a consultant for KBR Inc., Jeffrey Tesler, to 21 months in prison for his role in the scheme.[40] Tesler’s situation (as discussed in more detail above) further illustrates the ever broadening reach of the FCPA. He was a British solicitor who was extradited from the U.K. to the U.S. to stand trial for his purported violations of the statute.
The New York Times reported on April 21, 2012 that WalMart’s Mexican subsidiary had made a series of payments over time in the tens of millions of dollars, to Mexican officials to speed up the processing of building permits and other permits for the building of stores. The payments were alleged to have been made during the 2005 – 2006 timeframe. WalMart made an FCPA violations disclosure in an SEC filing in December 2011, and the news reports assert that WalMart engaged in some sort of cover-up at its executive level between 2006 and the time of its disclosure in 2011.
At this point, there is nothing concrete to report about the WalMart case, other than the assertions that are being made in news reports. However, the hype created by the news reports has raised the spectre of FCPA enforcement and FCPA internal compliance to a new height. There will be many legal questions likely evolving out the WalMart case, including issues of the statute of limitations and the facilitation payments exception to the FCPA. Also of interest will be the government’s appetite for taking on such a high profile prosecution, given the rather embarrassing recent string of setbacks and failures (O’Shea, "Shot-Show", Lindsey, etc.).
Practically speaking, complying with the FCPA can be difficult for businesses attempting to remain competitive in corrupt countries. But, with the growing enforcement of the FCPA, it is a necessity. Several tips can help a business avoid getting trapped in the web of corruption and enforcements.
First, it is important to recognize that the FCPA outlines certain permissible payments and affirmative defenses to alleged violations. Permissible payments include “facilitating payments,” which are payments to foreign officials to “expedite or to secure the performance of a routine governmental action.”[41] Payments to obtain permits, licenses or other official documents, payments to process governmental papers and to provide police protection and phone services are all examples of facilitating payments. The Act also lists several affirmative defenses, including: (1) payments that are lawful under the written laws of the foreign official’s country; (2) reasonable and bona fide expenses incurred in the promotion or demonstration of a company’s products or services; and (3) reasonable and bona fide expenses incurred in the execution or performance of a contract with a foreign government.[42] These expenses can include travel and lodging expenditures so long as such payments do not have a corrupt purpose. When in doubt of an action’s legality, a business should follow the spirit of the FCPA and consult with experienced counsel.
Second, and perhaps most importantly, avoiding FCPA violations involves embracing the value of corporate consciousness. That means establishing a corporate culture of ethical business – one where employees are encouraged to do business ethically and are sharply disciplined for unethical behavior. A company must have more than a “paper program” of good sounding policies. Even Siemens had nicely worded policies on ethical behavior.[43] A company must establish a system of monitoring and enforcing its ethical rules. Practical tips on achieving this goal include: encouraging dissent, appointing an ethics officer, marginalizing misconduct, rethinking goals, and performing regular risk assessments.[44] Above all, an organization cannot ignore red flags of misconduct. For example, Siemens engaged third parties that had no expertise in the industry, used forms for payment that included no note of the services received, and paid third parties unreasonably high fees.[45] These and other signs of corruption went undetected internally because Siemens refused to devise a system of internal controls adequate to catch and prevent FCPA violations.
Below are important elements of a solid compliance system:[46]
1. A written anti-corruption policy
2. Adequate procedures to implement and enforce the policy
3. At least one senior official in place responsible for the program
4. Training of:
b. Identified third-party intermediaries (“3PIs”) (downstream)
5. Communication of expectations to:
a. Non-identified 3PIs (upstream and downstream)
c. End-Users
6. Conducting Due-diligence
a. 3PIs (downstream) - specific
b. All other counter-parties - general
7. Performing periodic review with periodic certification
8. Implementing risk-based contractual provisions
9. A disciplinary policy
10. A specific policy on gifts, travel, and entertainment
11. Conducting Independent Review
12. Appropriate accounting controls (public v. private)
13. A “Hot / Whistle-blower” line (with follow-up procedures, plus procedure for management / law department reporting
14. Periodic legal assessments (audits)
15. Periodic self-assessment programs to identify risk
Third, a corporation must consider whether to voluntarily disclose any violations. While there is no legal requirement to self-disclose violations, both the DOJ and the SEC have made clear in statements and enforcements that voluntary disclosure, or the lack thereof, is a factor that is considered in formulating penalties. U.S. attorneys, for instance, are instructed to consider “the corporation’s timely and voluntary disclosure of wrongdoing and its willingness to cooperate” with the DOJ’s investigation when deciding a penalty.[47] The enforcement actions follow this mandate. For instance, Paradigm B.V.’s (“Paradigm”) employees bribed foreign officials in multiple countries for business generation purposes. When Paradigm discovered the bribery, it voluntarily disclosed the FCPA violations, cooperated with the DOJ’s investigation, and promised to create rigorous safeguards against future corruption. The DOJ, citing “Paradigm’s actions … including voluntary disclosure and remedial efforts,” agreed not to prosecute Paradigm criminally and fined the company “only” $1 million.[48] While $1 million is no small price to pay, it is much less than the multiple millions the DOJ and SEC could have sought. The advice of knowledgeable counsel is critical in the event a company ever faces the troublesome decision whether to self-disclose or not.
The DOJ and SEC are serious about leveling the playing field in foreign countries. Much like the steroid-using athletes, bribery-fueled corporations are being caught and punished with ever increasing frequency. After all, we were taught as children that “cheaters never prosper.” While not too long ago in certain countries that was far from the truth, today the DOJ and SEC – armed with the FCPA – are trying hard to make that moral principle a reality. But even beyond the entities and individuals who are actually bad actors, the spectre of this increased enforcement is an even greater burden for companies who actually are not doing “bad” things – but rather perhaps just “dumb” things. In today’s corporate world, it is axiomatic that a company which ignores real or constructive knowledge of potential red flags will be skewered in court if, at the end of the day, the violations are proven to be real. Companies are simply constrained to investigate and perform risk assessments, and the cost and burden of such activity can be enormous. A robust compliance program can mitigate these costs and provide a company its best chance of avoiding government scrutiny in the first place.
[*] The authors wish to gratefully acknowledge the assistance and contribution of their WWHGD colleagues Emily A. Poe and Daniel C. Beer in completing this article.
[1] The “books and records” provision is limited to publicly-traded companies and is within the enforcement jurisdiction of the SEC.
[2] Lest one read “within the U.S.” literally or narrowly (i.e., requiring physical presence), it is worth nothing that use of U.S. mail, telephone or email may suffice to secure U.S. jurisdiction over an activity originating outside the U.S.
[3] Press Release, Cheryl J. Scarboro, Assoc. Dir. of SEC’s Div. of Enforcement, U.S. Sec. and Exch. Comm’n, SEC Charges Siemens AG for Engaging in Worldwide Bribery, (Dec. 15, 2008) (on file with author).
[4] Press Release, Dep’t of Justice, Transcript of Press Conference Announcing Siemens AG and Three Subsidiaries Plead Guilty to Foreign Corrupt Practices Act Violations, (Dec. 15, 2008) (on file with author).
[5] Mike Koehler & David Simon, Foreign Corrupt Practices Act Compliance Lessons From the Record-Setting Siemens Enforcement Action, BNA White Collar Crime Report, Vol. 4, No. 5 (Feb. 27, 2009).
[6] Complaint at 1, Sec. and Exch. Comm’n v. ITT Corp., No. 1:09-cv-00272 (D.D.C. filed Feb. 11, 2009); Sec. and Exch. Comm’n v. ITT Corp., Litigation Release No. 20896, U.S. Sec. and Exch. Comm’n (Feb. 11, 2009).
[7] U.S. v. Daimler AG, No. 1:10-cr-00063 (D.C.C. April 1, 2010).
[9] U.S. v. DaimlerChrysler China Ltd., No. 1:10-cr-00066 (D.C.C. April 1, 2010).
[10] U.S. v. DaimlerChrysler Russia, No. 1:10-cr-00064 (D.C.C. April 1, 2010).
[11] U.S. v. Daimler Export and Trade Finance GmbH, No. 1:10-cr-00065 (D.C.C. April 1, 2010).
[12] Press Release, Dep’t of Justice, Magyar Telekom and Deutsche Telekom Resolve Foreign Corrupt Practices Act Investigation and Agree to Pay Nearly $64 Million in Combined Criminal Penalties (Dec. 29, 2011) (on file with author).
[13] Forecasting the Future of FCPA Enforcement, Corporate Counsel (May 9, 2012), available at http://www.law.com/jsp/cc/PubArticleCC.jsp?id=1202552821910.
[14] Sec. and Exch. Comm’n v. Wurzel, Litigation Release No. 21063, U.S. Sec. and Exch. Comm’n (May 29, 2009).
[15] Press Release, Dep’t of Justice, Two UK Citizens Charged by United States with Bribing Nigerian Government Officials to Obtain Lucrative Contracts as Part of KBR Joint Venture Scheme, (Mar. 5, 2009) (on file with author).
[16] Bob Van Voris & Patricia Hurtado, Ex-Siemens Executives Charged in $1 Billion Argentine ID Card Bribe Scheme, Bloomberg (December 13, 2011).
[17] 15 U.S.C. § 78dd-1(f)(1).
[18] See United States v. Carson, No. 09-77, 2011 WL 5101701 (C.D. Cal. May 18, 2011); United States v. Aguilar, 783 F. Supp. 2d 1108, 1109 (C.D. Cal. 2011).
[19] Complaint at 1, Sec. and Exch. Comm’n v. ITT Corp., No. 1:09-cv-00272 (D.D.C. filed Feb. 11, 2009); Sec. and Exch. Comm’n v. ITT Corp., Litigation Release No. 20896, U.S. Sec. and Exch. Comm’n (Feb. 11, 2009).
[20] 2011 Year-End FCPA Update, University of Denver Corporate and Commercial Law (January 24, 2012), available at http://denverlawcorpandcommblog.com/corporate-general/2011-year-end-fcpa-update-2/.
[21] 15 U.S.C. § 78dd-1(a).
[22] See, Mike Koehler, Compliance Lessons From an Active Year in FCPA Enforcement, BNA White Collar Crime Report, Vol. 3, No. 4 (Feb. 15, 2008) (discussing the enforcement action against Si Chan Wooh who bribed foreign officials with money and gifts).
[23] SEC v. Lucent Technologies Inc., No. 1:07-cv-02301 (D.C.C. Dec. 21, 2007).
[24] Press Release, Dep’t of Justice, Lucent Technologies Inc. Agrees to Pay $1 Million Fine to Resolve FCPA Allegations, (Mar. 5, 2009) (on file with author).
[25] Press Release, U.S. Sec. and Exch. Comm’n, SEC Charges KBR and Halliburton for FCPA Violations (Feb. 11, 2009) (on file with author).
[27] Lamb v. Phillip Morris, Inc., 915 F.2d 1024, 1029-30 (6th Cir. 1990).
[28] In re Faro Technologies Sec. Litig., 534 F. Supp. 2d 1248 (M.D. Fla. 2007); In re Nature’s Sunshine Prods. Sec. Litig., 486 F. Supp. 2d 1301 (D. Utah 2007); In re Immucor Inc. Sec. Litig., No. 2006 WL 3000133 (N.D. Ga. 4 Oct. 2006).
[29] See City of Harper Woods Employees’ Retirement Sys. v. Oliver, 577 F. Supp. 2d 124 (D. D.C. 2008) (alleging breach of fiduciary duty); Hijazi Medical Supplies v. AGA Medical Corp., No. 07-3419 2008 WL 4861517 *1 (10 Nov. 2008) (alleging breach of contract); Grynberg v. BP P.L.C., 585 F. Supp. 2d 50 (2008) (alleging RICO violations).
[30] United States v. Aguilar, CR 10-01031 A-AHM, 2011 WL 6097144, at *1 (C.D. Cal. Dec. 1, 2011).
[31] Dodd-Frank Whistleblower Provision: Impact on FCPA Enforcement, Securities Law Practice Center (March 17, 2011), available at http://seclawcenter.pli.edu/2011/03/17/dodd-frank-whistleblower-provisions-impact-on-fcpa-enforcement/.
[32] SEC Votes for Whistleblower Rules, The FCPA Blog: News and Views About The United States Foreign Corrupt Practices Act (May 25, 2011), available at http://www.fcpablog.com/blog/2011/5/25/sec-votes-for-whistleblower-rules.html.
[33] Mark Hosenball and Georgina Prodhan, U.S. Authorities Looking into Murdoch Foreign Payments, Reuters (February 7, 2012).
[35] Ed Pilkington, News Corp. Faces renewed threat of prosecution in US following Sun arrests, The Guardian (February 11, 2012).
[36] Mark Hosenball and Georgina Prodhan, U.S. Authorities Looking into Murdoch Foreign Payments, Reuters (February 7, 2012).
[37] Michael Winter, Feds Drop Big Case of Alleged Bid to Bribe Foreign Officials, USA Today (February 21, 2012).
[38] Carrie Johnson, Justice Department Drops Foreign Bribery Case, National Public Radio (March 8, 2012), available at http://www.npr.org/2012/02/22/147266966/justice-department-drops-foreign-bribery-case.
[39] Michael Winter, Feds Drop Big Case of Alleged Bid to Bribe Foreign Officials, USA Today (February 2,1, 2012).
[40] Chris Baltimore, Ex-KBR CEO Gets 30 Months for Nigeria Scheme, Reuters (February 23, 2012).
[41] 15 U.S.C. §§ 78dd-1(b), 78dd-2(b), 78dd-3(b).
[42] 15 U.S.C. § 78dd-1(c)(2)(A)-(b).
[43] Mike Koehler & David Simon, Foreign Corrupt Practices Act Compliance Lessons From the Record-Setting Siemens Enforcement Action, BNA White Collar Crime Report, Vol. 4, No. 5 (Feb. 27, 2009).
[44] Margaret Steen, How to Prevent Cheating, Stanford Bus. Magazine (June 25, 2008) http://www.gsb.stanford.edu/news/bmag/sbsm0808/feature-preventcheating.html.
[45] Mike Koehler & David Simon, Foreign Corrupt Practices Act Compliance Lessons From the Record-Setting Siemens Enforcement Action, BNA White Collar Crime Report, Vol. 4, No. 5 (Feb. 27, 2009).
[46] Derived in large part from various actual DOJ and SEC deferred prosecution agreements.
[47] Memorandum from Paul J. McNulty, Deputy Attorney Gen., U.S. Dep’t of Justice, on Principles of Federal Prosecution of Business Organizations.
[48] Press Release, Dep’t of Justice, Paradigm B.V. Agrees to Pay $1 Million Penalty to Resolve Foreign Bribery Issues in Multiple Countries, (Sept. 24, 2008) (on file with author).