Archive for the ‘Africa Sting’ Category

Stung By The Sting – Smith & Wesson Resolves FCPA Scrutiny That Originated With The Africa Sting

Tuesday, July 29th, 2014

In January 2010 when highlighting the manufactured Africa Sting enforcement action, I predicted that the public company employing one of the defendants was likely going to be the subject of Foreign Corrupt Practices Act scrutiny not only based on the alleged conduct in the Africa Sting case, but also other conduct as well because the indicted individual was the “Vice President−Sales, International & U.S. Law Enforcement” for the company.  That company, it soon was learned, was Smith & Wesson and indeed in July 2010 Smith & Wesson disclosed its FCPA scrutiny (see here).

In an instructive example of a dynamic I highlight in my recent article “Foreign Corrupt Practices Act Ripples” (that is every instance of FCPA scrutiny has a point of entry – in other words, a set of facts that give rise to the scrutiny in the first place – and this point of entry is often the beginning of a long and expensive journey for the company under scrutiny as the company – to answer the frequently asked “where else” question and to demonstrate its cooperation – will conduct a world-wide review of its operations), yesterday the SEC announced this administrative FCPA enforcement action against Smith & Wesson.

The conduct has nothing to do with the manufactured (and failed) Africa Sting case, but does involve Smith & Wesson’s former Vice President of International Sales and another individual referred to as the Regional Director of International Sales.  The SEC states in summary fashion as follows.

“This matter concerns violations of the anti-bribery,books and records and internal controls provisions of the Foreign Corrupt Practices Act (“FCPA”) by Smith & Wesson. The violations took place from 2007 through early 2010, when a senior employee and other employees and representatives of Smith & Wesson made, authorized, and offered to make improper payments  and/or to provide gifts to foreign officials in an attempt to win contracts to sell firearm products to foreign military and law enforcement departments. During this period, Smith & Wesson’s international business was in its developing stages and accounted for approximately 10% of the company’s revenues. Smith & Wesson’s employees and representatives engaged in a systemic pattern of making, authorizing and offering bribes while seeking to expand the company’s overseas business.

The bribe payments were inaccurately recorded in Smith & Wesson’s books and records as legitimate sales commissions or other business expenses. Despite its push to make sales in new and high risk markets overseas, Smith & Wesson failed to establish an appropriate compliance program or devise and maintain an adequate system of internal accounting controls, which allowed the repeated improper offers and payments to continue undetected for years.”

According to the SEC:

“Smith & Wesson does not have any international subsidiaries and conducts its international business directly and through brokering agents. Much of Smith & Wesson’s international business involves the sale of firearms to foreign law enforcement and  military departments.  [...] From 2007 through early 2010, as Smith & Wesson sought to break into international markets and increase sales, certain of the company’s employees and representatives engaged in a pervasive practice of making, authorizing and offering improper payments to foreign government officials as a means of obtaining or retaining international business. Although only one of the contracts was fulfilled before the unlawful activity was identified, company employees made or authorized the making of improper payments in connection with multiple ongoing or contemplated international sales.”

The SEC’s order contains factual allegations regarding the following countries: Pakistan, Indonesia, Turkey, Nepal and Bangladesh.

As to Pakistan, the SEC order states:

“In 2008, for example, Smith & Wesson retained a third-party agent in Pakistan to assist the company in obtaining a deal to sell firearms to a Pakistani police department. Even after the agent notified the company that he would be providing guns valued in excess of $11,000 to Pakistani police officials in order to obtain the deal, and that he would be making additional cash payments to the officials, the company authorized the agent to proceed with the deal. Smith & Wesson’s Vice President of International Sales and its Regional Director of International Sales authorized the sale of the guns to the agent to be used as improper gifts and authorized payment of the commissions to the agent, while knowing or consciously disregarding the fact that the agent would be providing the guns and part of his commissions to Pakistani officials as an inducement for them to award the tender to the company. Smith & Wesson ultimately sold 548 pistols to the Pakistani police for $210,980 and profited from the corrupt deal in the amount of $107,852.”

As to Indonesia, the SEC order states:

“In 2009, Smith & Wesson attempted to win a contract to sell firearms to a Indonesian police department by making improper payments to its third party agent in Indonesia, who indicated that part of the payment would be provided to the Indonesian police officials under the guise of legitimate firearm lab testing costs. On several occasions, Smith & Wesson’s third-party agent indicated that the Indonesian police expected Smith & Wesson to pay them additional amounts above the actual cost of testing the guns as an inducement to enter the contract. The agent later notified Smith & Wesson’s Regional Director of International Sales that the price of “testing” the guns had risen further. Smith & Wesson’s Vice President of International Sales and its Regional Director of International Sales authorized and made the inflated payment, but a deal was never consummated.”

As to Turkey, Nepal and Bangladesh, the SEC order states:

Similarly, Smith &Wesson made improper payments in 2009 to its third party agent in Turkey, who indicated that part of the payments would be provided to Turkish officials in an attempt to secure two deals in Turkey for sale of handcuffs to Turkish police and firearms to the Turkish military. Neither of these interactions resulted in the shipment of products, as Smith & Wesson was unsuccessful bidding for the first deal, while the latter deal was ultimately canceled. Similarly, Smith & Wesson authorized improper payments to third party agents who indicated that parts of these payments would be provided to foreign officials in Nepal and Bangladesh in unsuccessful attempts to secure sales contracts in those countries. Although these contemplated deals in Nepal and Bangladesh were never consummated in each case, the company had obtained or attempted to obtain the contract by using third party agents as a conduit for improper payments to government officials.”

The SEC’s order then states:

“Despite making it a high priority to grow sales in new and high risk markets overseas, the company failed to design and implement a system of internal controls or an appropriate FCPA compliance program reasonably designed to address the increased risks of its new business model. The company did not perform any anti-corruption risk assessment and conducted virtually no due diligence of its third-party agents regardless of the perceived level of corruption in the country in which Smith & Wesson was seeking to do business. Smith & Wesson  failed to devise adequate policies and procedures for commission payments, the use of samples for test and evaluation, gifts, and commission advances. The Vice President of International Sales had almost complete authority to conduct the company’s international business, including the sole ability to approve most commissions. Smith & Wesson’s FCPA policies and procedures, and its FCPA-related training and supervision also were inadequate. As a result of these compliance and internal controls failures, Smith & Wesson’s Vice President of International Sales and the Regional Director of International Sales were able to cause the company to pay and/or authorize improper payments in numerous countries around the globe for a period of several years.”

Under the headline “Remedial Measures,” the SEC order states:

“Smith & Wesson took prompt action to remediate its immediate FCPA issues, including: conducting an internal investigation, terminating its entire international sales staff; terminating pending international sales transactions; and re-evaluating the markets in which it sought international sales. In addition, Smith & Wesson implemented a series of significant measures to improve its internal controls and compliance processes, including: implementing new internal audit procedures to identify FCPA issues; creating more robust controls on payments, gifts, and other transactions in connection with international business activity; enhancing its FCPA compliance policies and procedures; and creating a Business Ethics and Compliance Committee.”

Based on the above findings, the SEC found that Smith & Wesson violated the FCPA’s anti-bribery provisions, books and records provisions and internal controls provisions.  As to the later, the SEC order states:

“Smith & Wesson failed to devise and maintain sufficient internal controls with respect to its international sales operations. While the company had a basic corporate policy prohibiting the payment of bribes, it failed to implement a reasonable system of controls to effectuate that policy. For example, Smith & Wesson failed to devise adequate policies and procedures with regard to commission payments, the use of samples for test and evaluation, gifts, and commission advances. Further, Smith & Wesson’s FCPA policies and procedures, and its FCPA-related training and supervision were inadequate.”

As highlighted in the SEC’s order, Smith & Wesson agreed to “report to the Commission staff on the status of [its] remediation and implementation of compliance measures at six-month to twelve-month intervals during a two-year term.” In addition, Smith & Wesson agreed to conduct an initial review – and two follow-up reviews – “setting forth a complete description of its remediation efforts to date, its proposals reasonably designed to improve the policies and procedures of Respondent for ensuring compliance with the FCPA and other applicable anticorruption laws, and the parameters of the subsequent reviews.”

In the SEC order, Smith & Wesson was ordered to cease and desist from future FCPA violations and agreed to pay $2,034,892 …  including $107,852 in disgorgement, $21,040 in prejudgment interest, and a civil monetary penalty of $1,906,000.”  In resolving its FCPA scrutiny, Smith & Wesson did not admit nor deny the SEC’s findings.

In this SEC release, Kara Brockmeyer (Chief of the SEC’s FCPA Unit) stated:

“This is a wake-up call for small and medium-size businesses that want to enter into high-risk markets and expand their international sales. When a company makes the strategic decision to sell its products overseas, it must ensure that the right internal controls are in place and operating.”

In this release, Smith & Wesson President and CEO James Debney stated:

“We are pleased to have concluded this matter with the SECand believe that the settlement we have agreed upon is in the best interests of Smith & Wesson and its shareholders.  Today’s announcement brings to conclusion a legacy issue for our company that commenced more than four years ago, and we are pleased to now finally put this matter behind us.”

John Pappalardo (Greenberg Traurig) represented Smith & Wesson.

Smith & Wesson’s stock price was down approximately .7% on the day of the SEC’s announcement of the enforcement action.

New Article Examines Overcriminalization, Plea Bargaining, And The FCPA Africa Sting Case

Tuesday, July 8th, 2014

A guest post today from my Southern Illinois University School of Law colleague Lucian Dervan.  Professor Dervan is a widely recognized expert on plea bargaining and has, among other things, testified before Congress on such issues.

*****

I greatly appreciate the opportunity to guest post on Professor Koehler’s FCPA Professor site.  In my post today, I will focus on my discussion of overcriminalization, plea bargaining, and the Africa Sting case in a new article just posted to SSRN – “The Quest for Finality: Five Stories of White Collar Criminal Prosecution,” 4 Wake Forest Journal of Law & Policy 91 (2014) (available here).

In an article I authored a few years ago for the George Mason Journal of Law, Economics, and Policy (available here), I discussed the growth of overcriminalization in the United States and the impact of broad and vague statutes on white collar criminal enforcement.  In particular, I argued that there is a symbiotic relationship between overcriminalization and plea bargaining because each of these important legal concepts relies on the other to flourish.

As I wrote in that article:

To illustrate the co-dependent nature of plea bargaining and overcriminalization, consider what it would mean if there were no plea bargaining. Novel legal theories and overly-broad statutes would no longer be tools merely for posturing during charge and sentence bargaining, but would have to be defended and affirmed both morally and legally at trial. Further, the significant costs of prosecuting individuals with creative, tenuous, and technical charges would not be an abstract possibility used in determining how great of an incentive to offer a defendant in return for pleading guilty. Instead, these costs would be a real consideration in determining whether justice is being served by bringing a prosecution at all.

Similarly, consider the significant ramifications that would follow should there no longer be overcriminalization. The law would be refined and clear regarding conduct for which criminal liability may attach. Individual benefits, political pressure, and notoriety would not incentivize the invention of novel legal theories upon which to base liability where none otherwise exists, despite the already expansive size of the United States criminal code. Further, novel legal theories and overly-broad statutes would not be used to create staggering sentencing differentials that coerce defendants, even innocent ones, to falsely confess in return for leniency.

In the Over-Criminalization 2.0 article, I went on to focus on the Computer Associates prosecution.  In the Computer Associates case, the government requested the company retain outside counsel to perform an internal investigation regarding allegations of accounting improprieties.  During that internal investigation, several employees allegedly lied to investigating counsel.  The government later brought obstruction of justice charges against those employees.  In the indictment, the government argued that the defendants “knew, and in fact intended, that the company’s law firm would present these false justifications to the United States Attorney’s Office, the SEC and the FBI so as to obstruct and impeded (sic) the government investigations.”

This broad and creative application of an obstruction of justice statute (18 U.S.C. § 1512(c)(2)) led to widespread concern from various sectors of the legal community.  In particular, much unease was expressed about the impact of this charging decision on the role of privately retained investigating counsel.  Had the government deputized law firms?  Embracing similar concerns, including concerns about the impact of this case on the attorney-client privilege, the defendants challenged the government’s theory of the case.  Unfortunately, the district court dismissed the motion without specifically addressing the core issues of concern.  While the stage appeared set for an important review of this charging theory by the United States Court of Appeals for the Second Circuit, no such review ever took place.  As is so common today, the opportunity to examine the broad application of a vague statute was lost to the power of plea bargaining.  Instead of proceeding to the appellate court, all of the defendants pleaded guilty and the corporation entered into a deferred prosecution agreement.  Once again, the symbiotic relationship between overcriminalization and plea bargaining had prevented a true judicial review of this case.

In my new article, The Quest for Finality, I found similar issues in the FCPA Africa Sting case.  As readers of FCPA Professor will recall, the Africa Sting case involved an undercover FCPA operation targeting the defense sector.  As occurred in the Computer Associates case, the government used creative legal theories to build key aspects of its case.  Unlike the Computer Associates case, however, not all of the defendants pleaded guilty.  Therefore, the broad application of vague criminal statutes was tested and the results were very favorable for the defense.

In September 2011, a number of the Africa Sting defendants who had resisted the government’s offers of leniency in return for pleas of guilt went on trial.  Almost immediately, the government’s case began to fall apart under the weight of judicial scrutiny.  At one point, Judge Richard Leon stated, “I read all sixteen indictments, and I didn’t see it. I have zero sense that there was an omnibus grand conspiracy.”  Despite these words of caution, the government continued to pursue the conspiracy charges, the same conspiracy charges to which other defendants had already pleaded guilty.  Finally, after giving the government ample opportunity to make its case, Judge Leon dismissed the conspiracy counts in the middle of the trial.  Eventually, when the trial concluded, the case ended without a single conviction on the remaining counts.

In February 2012, the government asked Judge Leon to dismiss the charges against the remaining defendants awaiting trial in the Africa Sting matter.  As discussed on FCPA Professor at the time (see here), Judge Leon granted the motion and stated:

“This appears to be the end of a long and sad chapter in the annals of white-collar criminal enforcement. Unlike takedown day in Las Vegas, however, there will be no front page story in the New York Times or the Post for that matter tomorrow reflecting the government’s decision today to move to dismiss the charges against the remaining defendants in this case. Funny isn’t it what sells newspapers.
….

Two years ago, at the very outset of this case I expressed more than my fair share of concerns on the record regarding the way this case has been charged and was being prosecuted. Later, during the two trials that I presided over I specifically commented again on the record regarding the government’s very, very aggressive conspiracy theory that was pushing its already generous elasticity to its outer limits. Of course, in the second trial that elastic snapped in the absence of the necessary evidence to sustain it.

In addition, in that same trial, I expressed on a number of occasions my concerns regarding the way this case had been investigated and was conducted especially vis-a-vis the handling of Mr. Bistrong. I even had an occasion, sadly, to chastise the government in a situation where the government’s handling of the discovery process constituted sharp practices that have no place in a federal courtroom.”

In a move seldom seen, the government even went on to dismiss the charges against the defendants who had already pleaded guilty in the case.

In discussing, amongst others, the Africa Sting prosecution in my new article on The Quest for Finality, I examine once again the role of plea bargaining.

It is disturbing to recognize that if all of the defendants in the Broadcom or Africa Sting cases had taken plea deals, we would likely never have learned just how tenuous the government’s positions were in these matters.  Further, evidence demonstrates that it is not unlikely that all the defendants in such a case might plead guilty, even if they were innocent.  During 2011 and 2012, Professor Vanessa Edkins and I conducted a psychological study in which we placed students in a situation where they were accused of cheating.  All the students, regardless of factual guilt or innocence were then offered a deal.  Of the guilty participants, 89% took the plea deal. Of the innocent participants, 56% took the plea deal.  Given the incentives plea bargaining creates for defendants to falsely admit guilt and the observed utilization of plea bargaining as a tool to mask flawed criminal cases where the evidence alone is insufficient for conviction at trial, perhaps it is time to reevaluate our reliance on bargained justice.

The Africa Sting Case is one in which a number of defendants proceeded to trial to challenge the government’s theory of the case.  Such challenges, however, have become a rarity in today’s criminal justice system.  As the Computer Associates case illustrates, even where the government’s aggressive application of broad criminal statutes draws wide attention, most defendants succumb to the powerful incentives plea bargaining offers to forgo trial.

You can read the full examination of the Africa Sting case and related white collar prosecutions by clicking here for a free copy of the article.

Referenced Articles

  • The Quest for Finality: Five Stories of White Collar Criminal Prosecution, 4 Wake Forest Journal of Law & Policy 91 (2014) (available here).
  • Over-Criminalization 2.0: The Symbiotic Relationship Between Plea Bargaining and Overcriminalization, 7 The Journal of Law, Economics, and Policy 645 (2011) (available here).
  • The Innocent Defendant’s Dilemma: An Innovative Empirical Study of Plea Bargaining’s Innocence Problem, 103 Journal of Criminal Law & Criminology 1 (2013) (with Dr. Vanessa A. Edkins) (available here).

Richard Bistrong … In His Own Words

Monday, April 14th, 2014

Richard Bistrong.

Most people likely associate his name with the manufactured Africa Sting FCPA enforcement action. The Africa Sting action involved a purported deal to purchase equipment for the presidential guard of an African Government with FBI agents posing as African Government officials and Bistrong working as an undercover informant.

The Africa Sting enforcement action resulted in criminal charges against 22 individuals.  After extensive motions practice and two trials, all charges against all defendants were ultimately dismissed by the DOJ and the action ended with Judge Richard Leon (D.D.C.) calling the entire case a “long and sad chapter in the annals of white collar criminal enforcement.” (See here).

Bistrong was not charged in the Africa Sting case, but previously pleaded guilty to “real-world” Foreign Corrupt Practices Act conduct, including conspiring with others to bribe United Nations officials, Dutch officials, and Nigeria officials.  (See here and here). This charge stemmed from Bistrong’s work as the international sales vice president for a large, successful and publicly traded multi-national corporation.  Bistrong started to cooperate with the DOJ in June 2007 and Judge Leon ultimately credited Bistrong’s extensive cooperation at sentencing.  (See here).

FCPA Professor seeks to highlight a wide range of voices on FCPA issues.  With this goal in mind, I requested to communicate with Bistrong with the permission of his attorney.  Bistrong’s attorney, Brady Toensing (diGenova & Toensing) would not allow his client to discuss questions about the Africa Sting case.

At present, Bistrong is out of prison but still serving the supervised release portion of his sentence.

In this detailed Q&A, Bistrong describes: the circumstances that put him in a position to violate the FCPA; what made him think he could get away with it; his thought process when he realized he was caught; and how he spent his time in federal prison. In the Q&A Bistrong not only looks back, but forward as well and shares what he learned from his experience and what he hopes to accomplish in the future, including through his recently launched blog.

Friday Roundup

Friday, March 28th, 2014

Further trimmed, scrutiny alerts and updates, facts and figures, quotable, and for the reading stack.  It’s all here in the Friday roundup.

Further Trimmed

When the SEC announced its enforcement action against James Ruehlen and Mark Jackson  (a current and former executive of Noble Corp.) in February 2012, I said that this would be an interesting case to follow because the SEC is rarely put to its burden of proof in FCPA enforcement actions – and when it has been put to its ultimate burden of proof – the SEC has never prevailed in an FCPA enforcement action.

Over the past two years, the SEC’s case has been repeatedly trimmed.  (See this recent post containing a summary).  In the latest cut, the SEC filed an unopposed motion for partial voluntary dismissal with prejudice on March 25th.  In pertinent part, the motion states as follows.

“To narrow this case and streamline the presentation of evidence to the jury, the SEC hereby moves for leave to voluntarily dismiss with prejudice all portions of its claims … predicated upon Noble Corporation’s violation of [the FCPA’s internal controls provisions”.

For additional specifics, see the filing.

As highlighted in this previous post, in 2010 the SEC charged Noble Corporation with violating the FCPA’s anti-bribery, books and records and internal controls provisions based on the same core conduct alleged in the Jackson/Ruehlen action. Without admitting or denying the SEC’s allegations, Noble agreed to agreed to an injunction and payment of disgorgement and prejudgment interest of $5,576,998.

In short, the SEC’s enforcement action against Ruehlen and Jackson is a shell of its former self.   Interesting, isn’t it, what happens when the government is put to its burden of proof in FCPA enforcement actions.

Scrutiny Alerts and Updates

Alstom

Bloomberg reports speculation that a future FCPA enforcement action against Alstom could top the charts in terms of overall fine and penalty amounts.  (See here for the current Top 10).

The article states:

“The Justice Department is building a bribery case against Alstom SA , the French maker of trains and power equipment, that is likely to result in one of the largest U.S. anticorruption enforcement actions, according to two people with knowledge of the probe. Alstom, which has a history checkered with corruption allegations, has hindered the U.S. investigation of possible bribery in Indonesia and now faces an expanded probe including power projects in China and India, according to court documents in a related case. Settlement talks haven’t begun, the company said.”

In response to the Bloomberg article, Alston released this statement.

“Robert Luskin of Patton Boggs, Alstom’s principal outside legal advisor in the USA, states that the Bloomberg article published on 27 March 2014, regarding the investigation of Alstom by the US Department of Justice, does not accurately reflect the current situation: “Alstom is cooperating closely, actively, and in good faith with the DOJ investigation. In the course of our regular consultations, the DOJ has not identified any on-going shortcomings with the scope, level, or sincerity of the company’s effort”.

“The discussions with the DOJ have not evolved to the point of negotiating a potential resolution of any claims. Any effort to estimate the size of any possible fine is sheer speculation, as would be any comparison with other cases that have recently been resolved. Alstom has agreed to focus its efforts on investigating a limited number of projects that we and the DOJ have identified in our discussions. We are working diligently with the DOJ to answer questions and produce documents associated with these specific projects so that we can address any possible improper conduct”.

VimpelCom

Netherlands-based and NASDAQ traded telecommunications company VimpelCom recently disclosed:

“[T]hat in addition to the previously disclosed investigations by the U.S. Securities and Exchange Commission and Dutch public prosecutor office, the Company has been notified that it is also the focus of an investigation by the United States Department of Justice. This investigation also appears to be concerned with the Company’s operations in Uzbekistan. The Company intends to continue to fully cooperate with these investigations.”

On March 12, 2014, VimpelCom disclosed:

“The Company received from the staff of the United States Securities and Exchange Commission a letter stating that they are conducting an investigation related to VimpelCom and requesting documents. Also, on March 11, 2014, the Company’s headquarter in Amsterdam was visited by representatives of the Dutch authorities, including the Dutch public prosecutor office, who obtained documents and informed the Company that it was the focus of a criminal investigation in the Netherlands. The investigations appear to be concerned with the Company’s operations in Uzbekistan. The Company intends to fully cooperate with these investigations.”

Orthofix International

As noted in this Wall Street Journal Risk & Compliance post, Orthofix International recently disclosed:

“We are investigating allegations involving potential improper payments with respect to our subsidiary in Brazil.

In August 2013, the Company’s internal legal department was notified of certain allegations involving potential improper payments with respect to our Brazilian subsidiary, Orthofix do Brasil. The Company engaged outside counsel to assist in the review of these matters, focusing on compliance with applicable anti-bribery laws, including the Foreign Corrupt Practices Act (the “FCPA”). This review remains ongoing.”

As noted in this previous post, in July 2012 Orthofix International resolved a DOJ/SEC FCPA enforcement action concerning alleged conduct by a Mexican subsidiary.  In resolving that action, the company agreed to a three year deferred prosecution agreement.  As is typical in FCPA DPAs, in the Orthofix DPA the DOJ agreed not continue the criminal prosecution of Orthofix for the Mexican conduct so long as the company complied with all of its obligations under the DPA, including not committing any felony under U.S. federal law subsequent to the signing of the agreement.

See this prior post for a similar situation involving Willbros Group (i.e. while the company while under a DPA it was investigating potential additional improper conduct).  As noted here, Willbros was released from its DPA in April 2012, the original criminal charges were dismissed and no additional action was taken.

Besso Limited

Across the pond, the U.K. Financial Conduct Authority (“FCA”) recently issued this final notice to Besso Limited imposing a financial penalty of £315,000 for failing “to take reasonable care to establish and maintain effective systems and controls for countering the risks of bribery and corruption associated with making payments to parties who entered into commission sharing agreements with Besso or assisted Besso in winning and retaining business (“Third Parties”).”

Specifically, the FCA stated:

“The failings at Besso continued throughout the Relevant Period [2005-2011] and contributed to a weak control environment surrounding the making of payments to Third Parties. This gave rise to an unacceptable risk that payments made by Besso to Third Parties could be used for corrupt purposes, including paying bribes to persons connected with the insured or public officials. In particular Besso:  (1) had limited bribery and corruption policies and procedures in place between January 2005 and October 2009. It introduced written bribery and corruption policies and procedures in November 2009, but these were not adequate in their content or implementation; (2) failed to conduct an adequate risk assessment of Third Parties before entering into business relationships; (3) did not carry out adequate due diligence on Third Parties to evaluate the risks involved in doing business with them; (4) failed to establish and record an adequate commercial rationale to support payments to Third Parties; (5) failed to review its relationships with Third Parties, in sufficient detail and on a regular basis, to confirm that it was still appropriate to continue with the business relationship; (6) did not adequately monitor its staff to ensure that each time it engaged a Third Party an adequate commercial rationale had been recorded and that sufficient due diligence had been carried out; and (7) failed to maintain adequate records of the anti-bribery and corruption measures taken on its Third Party account files.”

The FCA has previously brought similar enforcement actions against Aon Limited (see here), Willis Limited (see here), and JLT Speciality Limited (see here).    For more on the U.K. FCA and its focus on adequate procedures to prevent bribery , see this guest post.

Facts and Figures

Trace International recently released its Global Enforcement Report (GER) 2013 – see here to download.  Given my own focus on FCPA enforcement statistics and the various counting methods used by others (see here for a recent post), I particularly like the Introduction of the GER in which Trace articulates a similar “core” approach that I use in keeping my enforcement statistics.  The GER states:

“[W]hen a company and its employees or representatives face multiple investigations or cases in one country involving substantially the same conduct, only one enforcement action is counted in the GER 2013.  An enforcement action in a country with multiple investigating authorities, such as the U.S., is also counted as one enforcement action in the GER 2013.”

The Conference Board recently released summary statistics regarding anti-bribery policies.  It found as follows.

39% of companies in the S&P Global 1200; 23% of companies in the S&P 500; and 14% of companies in the Russell 1000 reported having a policy specifically against bribery.

Given the results of other prior surveys which reported materially higher numbers, these results are very surprising.

Quotable

This recent Wall Street Journal article “Global Bribery Crackdown Gains Steam” notes as follows.

“Cash-strapped countries are seeing the financial appeal of passing antibribery laws because of the large settlements collected by the U.S., according to Nathaniel Edmonds, a former assistant chief at the U.S. Department of Justice’s FCPA division.  ”Countries as a whole are recognizing that being on the anticorruption train is a very good train to be on,” said Mr. Edmonds, a partner at Paul Hastings law firm.”

The train analogy is similar to the horse comment former DOJ FCPA enforcement attorney William Jacobson made in 2010 in an American Lawyer article that “[t]he government sees a profitable program, and it’s going to ride that horse until it can’t ride it anymore.”  For additional comments related to the general topic, see this prior post.

Reading Stack

This recent Wall Street Journal Risk & Compliance Journal post contains a Q&A with former DOJ FCPA Unit Chief Chuck Duross.  Contrary to the inference / suggestion in the post, Duross did not bring “tougher tactics” such as wires and sting operations to the FCPA Unit.  As detailed in prior posts here and here, undercover tactics and even sting operations had been used in FCPA enforcement actions prior to the Africa Sting case.

Speaking of the Africa Sting case, the Q&A mentions reasons for why the Africa Sting case was dropped.  Not mentioned, and perhaps relevant, is that the jury foreman of the second Africa Sting trial published this guest post on FCPA Professor after the DOJ failed in the second trial.  Two weeks later, the DOJ dismissed all charges against all Africa Sting defendants.

Further relevant to the Africa Sting case, the Wall Street Journal recently ran this article highlighting the role of Richard Bistrong, the “undercover cooperator” in the case.  Bistrong has recently launched an FCPA Blog – see here.

*****

A good weekend to all.

Africa Sting Continues To Sting

Wednesday, May 15th, 2013

Judge Richard Leon called the collapse of the DOJ’s manufactured Africa Sting case in 2012 “the end of a long and sad chapter in the annals of white collar criminal enforcement.” (See here for the prior post).

As highlighted in my article, “What Percentage of DOJ FCPA Losses is Acceptable?” bringing criminal charges and marshalling the full resources of law enforcement agencies against an individual alters the lives of real people and their families, sidetracks real careers, empties real bank accounts in mounting a defense, and causes often irreversible damage to real reputations.

The manufactured Africa Sting case also had a negative impact on companies that employed the individuals charged in the case.  Previous posts here, here and here explored the various business effects of the Africa Sting case.

The Africa Sting case continues to have a negative impact on companies indirectly involved in the manufactured case.  In 2011, BlastGard International Inc. acquired HighCom Security Inc.  HighCom’s former CEO Yochanan Cohen was one of the individuals charged in the Africa Sting in January 2010.  In a recent disclosure BlastGard stated as follows.

“On January 19, 2010, the U.S. Department of Justice (“DOJ”) unsealed indictments of 22 individuals from both the law enforcement and defense supply industry, one of whom was HighCom’s then Chief Executive Officer, Yochanan Cohen, as an individual for allegedly violating [the FCPA].  (Note: On February 24, 2012, the United States District Court of Columbia, upon consideration of the government’s motion to dismiss, ordered the dismissal (with prejudice) of the indictment and superseding indictments against 22 defendants.)  HighCom was not a party to this indictment. HighCom has always taken, and continues to take seriously, our obligation as an industry leader to foster a responsible and ethical culture, which includes adherence to laws and industry regulations in the United States and abroad.  Following this indictment, Mr. Cohen stepped down from his daily responsibilities as CEO of HighCom.  As a result of this indictment, although not a named party to the indictment, in March 2010, HighCom was placed under a policy of denial by the U.S. State Department.  This resulted in a suspension of HighCom’s ability to export certain armor products under U.S. Government Regulations.  This effectively ended HighCom’s export capacity and significantly impacted its operations and ability to deliver product to its customers and in particular fulfill its shipment obligations under the U.N. contract awarded in late 2009.  HighCom was suspended by the US Dept. of Defense and added to its Excluded Party List. This severely restricted its ability to sell product in the US defense sector. To regain its export privileges under US State Department regulations, Mr .Cohen, as CEO and majority shareholder, was required to resign as an executive corporate officer and director and fully divest his equity interest in HighCom. On January 25, 2011, Mr. Cohen entered into a binding Letter of Intent to sell his equity interest to BlastGard International Inc. and closing occurred on March 4, 2011.”

“Concurrent with Mr. Cohen’s resignation both as a director and officer of HighCom and the sale of his equity interest to BlastGard, BlastGard filed with the US State Department to have the policy of denial lifted in order to regain HighCom’s ability to export certain armor products again.  As of March 29, 2011 this order of denial had been lifted and HighCom’s export privileges have been reinstated.  HighCom also successfully applied to the US Defense Dept to be removed from the Excluded Party List (“EPLS”). The successful reinstatement of HighCom’s export authority and its removal from the EPLS has dramatically improved HighCom’s ability to sell and market its products.  BlastGard has also been reinstated as a vendor for potential bids under the United Nations and has already completed several small orders since its reinstatement. However, on February 6, 2012, the United Nations notified the Company that the UN Secretariat Review Committee met on January 27, 2012 to review the vendor registration status of HighCom Security, Inc. The Committee noted the indictment of HighCom’s former CEO on four counts. Based on those charges, and in accordance with the UN’s policy with regards to ethics and compliance issues, placed an immediate hold on the registration status of HighCom, pending the UN’s internal review. The Company requested that the UN reconsider their decision as HighCom is under new ownership and management and that since their decision the United States District Court of Columbia dismissed all charges against the former CEO. A final decision is still pending the UN’s internal review.”

“In March 2011, BlastGard’s management team officially assumed operational control of HighCom.  Since this time we have accomplished a number of key compliance tasks and are currently in the process of finalizing manufacturing agreements with several key partners.  As stated in the paragraph above, BlastGard has received official communication from the U.S. State Department that HighCom’s export authority has been reinstated. In addition to this, BlastGard has completed registration through both the Directorate of Defense Trade Controls as well as the Bureau of Industry and Security (“BSI”). The purpose of these registrations is to allow BlastGard control over the export management and compliance program moving forward.  HighCom also completed their ISO certification which had been revoked under HighCom due to missed audits.  BlastGard management has been able to complete an internal audit and management review, in addition to meeting with BSI for the external audit review and in March 2012 HighCom secured ISO certification. Communication with the United Nations is ongoing. On February 6, 2012, the Company was notified by letter that the United Nation’s Vendor Review Committee (“VRC”) had recommended to immediately place on hold the registration status of HighCom Security. This VRC decision to place on hold our registration status was based on integrity/ethical issues surrounding the former CEO’s actions. Soon after this decision was made, we were notified that on February 21, 2012 the government dismissed all the charges against the former CEO. The Company has been in communication with the United Nations Procurement Division regarding this matter and on March 15, 2012, the Company was informed that the VRC had met regarding our request for re-instatement and that its recommendation is currently under consideration. To date we have not been re-instated but we are in communication with the United Nations Procurement Division in an effort of securing re-instatement. BlastGard has also made significant personnel changes within HighCom and restructuring of operating locations and costs. Since the completion of our acquisition of HighCom, the Company has focused its employee time and capital resources primarily on the development of the business of HighCom. Our results of operations for 2012 demonstrate the benefits of these changes.”