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Here’s To You Mr. Alderman

Friday, April 20th, 2012

I remember the day well. In July 2010, an e-mail appears in my inbox from the U.K. Serious Fraud Office in which I am told that Richard Alderman (Director of the SFO), a reader of FCPA Professor, would like to have a discussion with me about anti-corruption issues. FCPA Professor was then 1 year old and learning of readers the caliber of Mr. Alderman … well, let’s just say that was awesome. Since then, I’ve had the pleasure to visit the SFO’s offices in London and continue the dialogue with Alderman, including through his contributions to this website.

In “A Conversation with Richard Alderman” (here), Alderman responded to approximately thirty detailed questions I submitted covering a broad range of topics and he: (i) compares and contrasts the SFO’s role with the DOJ’s role in enforcing the Foreign Corrupt Practices Act, including the more active and independent role U.K. courts have in reviewing SFO charging decisions; (ii) talks about voluntary disclosure, and the role of non-prosecution and deferred prosecution agreements; (iii) discusses reputational harm, debarment, and reparations; and (iv) talks specifically about the Bribery Act.

In this follow-up after BAE’s settlement, Alderman responsed to six pointed questions I submitted concerning the BAE case and his responses address the following topics. (i) how the U.K. law on double jeopardy significantly affected the SFO’s investigation of BAE and how the “current system [in the U.K.] for dealing with parallel criminal investigations conducted in a number of different countries does not work effectively and needs change;” (ii) whether the U.K. government was faithful to its OECD obligations in its handling of the BAE matter; (iii) criticism of the SFO-BAE plea agreement by the U.K. sentencing judge; and (iv) “shortcomings” in the U.K. system and how Alderman would like a system that “is far more transparent [...] that commands public confidence, together with a much stronger role for the judiciary.”

In this guest post, Mr. Alderman discusses engagement with companies and compliance effects in the aftermath of the Bribery Act.

Active engagement was a hallmark of Alderman’s tenure at the SFO – and his willingness to engage with me on topics we occassionaly sparred has been one of the highlights of my young academic career.

So on this, your last day at the SFO, here’s to you Mr. Alderman.

What’s next for Alderman? He told me in a recent e-mail (published with his permission) the following – all the more reason for me to tip my hat to him.

“When I leave here at the end of this week I shall not be going through the revolving door into some well paid job in a legal firm. Nor will I be taking on anything that will bring me into any contact with the SFO. My successor needs to get on with the job himself. What I shall be looking for instead are opportunities to work on anti-corruption initiatives that make a real difference in other countries. This will not be by way of a job or a consultancy. There are very many interesting people in this area that I admire very much and who do so much to fight corruption and the damage it causes. I shall obtain real satisfaction if I can find ways of helping them as I move on.”

Where Should The Money Go?

Monday, March 26th, 2012

[A new job has been posted to the Jobs Board - see here. Both job seekers and organizations seeking to hire individuals with FCPA or related experience will benefit from a wide selection of job listings, so please spread the word and send the job link to your HR department and professional contacts]

It is a thorny question with no easy answer. Where should the money go when a company resolves an FCPA enforcement action? It was addressed last year in connection with the Alcatel-Lucent enforcement action. (See here, and here for prior posts). Two recent events raise the issue again.

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Earlier this month, it was announced (here) that the U.K. “Serious Fraud Office, the Government of Tanzania, BAE Systems and the Department for International Development (DFID) … signed a Memorandum of Understanding enabling the payment of £29.5 million [$47 million USD] plus accrued interest to be paid by BAE Systems for educational projects in Tanzania.” As noted in the release, “textbooks will be purchased for all 16,000 primary schools in the country and as a result 8.3 million children will benefit” in subjects such as Kiswahli, English, Maths and Science. The release further notes that funds will also be used to ”provide all 175,000 primary school teachers with teachers’ guides, syllabi and syllabi guides to help improve their teaching skills” as well as the purchase of desks. In the release, SFO Director Richard Alderman stated as follows. “This agreement is a first for the SFO which piloted it through the UK legal system. It provides a satisfactory outcome for all concerned but most of all for the Tanzanian people and I am personally delighted that SFO staff were able to achieve this.”

In this release, BAE stated as follows. “We are glad to finally be able to make the payment to the Government of Tanzania and bring this matter to a close. We are grateful to DFID for their work in agreeing the Memorandum of Understanding with the Government of Tanzania.” The BAE release states that the “payment follows the settlement agreed between BAE Systems and the SFO.” For a prior post on the settlement, see here.

To be sure, BAE’s payment to Tanzania, and the role of the SFO in brokering the payment, feels good. What is not to like about children receiving textbooks?

However, the feel good nature of this most recent BAE development should not mask the significant problems with the BAE enforcement action (on both sides of the Atlantic). As noted in this prior post, even the U.K. judge who accepted the SFO-BAE plea agreement called it “loosely and hastily drafted” and said the fine he levied reflected that he couldn’t “sentence for an offense which the prosecution failed to charge.”

And let’s not forgot how this story began. In 2004, the SFO began investigating whether BAE made bribe payments to secure Saudi fighter jet contracts. However, in late 2006, the SFO was forced to halt its investigation under pressure from the U.K. government, which cited national security concerns should the investigation go forward. However, because BAE also allegedly made bribe payments in numerous other countries to secure business, the SFO, under a new Director, revived its investigation of BAE, at least as to non-Saudi issues, including whether the company paid bribes to secure contracts in various European and African countries. After settlement talks stalled – the conventional wisdom is that BAE was unwilling to plead guilty to bribery related offenses given the collateral effect of the mandatory European Union debarment provisions – the SFO pressed ahead with the case. In late January 2010, the SFO issued a release (here) stating that Count Mensdorff, a former BAE agent, was criminally charged with “conspiracy to corrupt” and for “conspiring with others to give or agree to give corrupt payments […] to officials and other agents of certain Eastern and Central European governments, including the Czech Republic, Hungary and Austria as inducements to secure, or as rewards for having secured, contracts from those governments for the supply of goods to them, namely SAAB/Gripen fighter jets, by BAE Systems Plc.” Then, in early February 2010, the SFO announced (here) its long-awaited resolution of the BAE matter. Despite allegations of wide-spread bribery on a global scale, and despite BAE’s agent being criminally indicted a few days earlier in connection with bribe payments in “certain Eastern and Central European countries” (presumably on evidence that such payments did indeed occur), the SFO resolution related solely to the company’s failure “to keep reasonable and accurate accounting records in relation to its activities in Tanzania.” Most dramatic, and in a strange turn of events, the SFO announced that it had withdrawn the criminal charges filed days earlier against Count Mensdorff. The same release also noted that “[t]his decision brings to an end the SFO’s investigations into BAE’s defense contracts.” For more on “BAE – Inside the SFO”, see this prior post.

In any event, at least some children in Tanzania received some textbooks from BAE as a result.

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As previously highlighted on the FCPA Blog (here), Socio-Economic Rights and Accountability Project (“SERAP”) (a non-governmental civil society organization in Nigeria) recently wrote a letter (here) to SEC Enforcement Division Director Robert Khuzami (with a copy to Assistant Attorney General Lanny Breuer and Deputy Chief, Fraud Section Charles Duross) regarding “FCPA civil penalty and disgorgement proceeds that companies agree to pay to resolve US Foreign Corrupt Practices Act investigations.” As the letter notes, “currently such proceeds, once paid, are retained by the U.S. government.”

In summary, the SERAP letter requests “that the Enforcement Division establish a case-by-case policy or process that would enable foreign governmental entities that have been victims of corruptly-procured contracts to apply for, subject to appropriate anti-corruption safeguards, some or all of the civil penalty and disgorgement proceeds that would eventually be paid by companies alleged to have violated the U.S. Foreign Corrupt Practices Act.” SERAP also suggests that “civil society groups in the home country, or U.S. non-profit organizations serving that country, be eligible within a short time-period to apply for such proceeds as well, or instead, for use for ‘public benefits projects’ in the affected foreign country, again subject to anti-corruption safeguards.”

The SERAP letter notes, among other things, as follows. “… Many citizens in a country where such bribery has occurred might consider FCPA civil penalties and disgorgement payments imposed by the US, and then kept by the US, as in fact representing funds that rightfully ‘belong’ to the victim.”

Stating that “corruptly procured contracts ‘cost’ the victim at least 10 percent extra” the SERAP letter says that “this figure ought to be a presumed measure of possible funds available for third-party application in the context of a civil FCPA settlement, particularly since the Enforcement Division typically settles an investigation before extensive evidence of damages, as opposed to liability, is placed in the public realm.”

The specific SERAP proposal is as follows. “…[A]fter, and ony after, public notice of an FCPA settlement agreement, the victim foreign government entity and any applicant NGO would have 60 days to file a request that the Enforcement Division pay some or all of the agreed payment proceeds to or for the benefit of the victim government entity or to a home country-based or US based NGO that would present a proposal [to] spend the proceeds for public purposes (e.g. on public health programs) in the country of the victim entity. Thereafter, the Enforcement Division would have 60 days to act upon the request, favorably or not in its discretion; in this context the Enforcement Division should provide a brief statement of its reasons for its decisions. In reaching its decisions the Enforcement Division would have the inherent authority to consult with Executive Branch agencies of the US government.

The SERAP letter raises some interesting issues regarding alleged victims of FCPA enforcement actions. The SERAP letter also raises some interesting questions, including the following.

If the SEC would be required to relinquish a certain portion of money recovered in an FCPA enforcement action, what impact would this have on FCPA enforcement? Would the SEC be less aggressive in bringing enforcement actions or perhaps more aggressive because more enforcement actions would be needed to sustain the current FCPA ”revenue stream”? For instance, 10% of SEC FCPA “revenue” in 2011 was approximately $15 million, in 2010 approximately $53 million.

The SERAP proposal appears to assume that all FCPA enforcement actions involve foreign government procurement. This is not the case. Approximately 50% of recent FCPA enforcement actions (i.e. in the past five years) do not involve foreign government procurement, but rather issues relating to foreign taxes, customs duties, or foreign licenses, permits, certifications and the like. Is the victim analysis the same in these FCPA enforcement actions compared to foreign government procurement enforcement actions?

Are individuals or organizations located in the country giving rise to the FCPA enforcement action really the most direct victims of the conduct at issue? In the procurement context, what about a competitor who may have lost out on the foreign business because it was unwilling to make an improper payment? With victim issues attracting new attention, should an FCPA private right of action receive new attention?

Last, but certainly not least, companies settling SEC FCPA enforcement actions are allowed to settle without admitting or denying the SEC’s allegations. Even the SEC itself has stated that this settlement device often leads to settlements that ”do not necessarily reflect the triumph of one party’s position over the other.” Given this dynamic, would SERAP’s proposal lead to undeserved “windfalls” for civil society organizations? [In this prior post, I asked the same question as to Dodd-Frank Act whistleblowers.]

The Final Act In The BAE Circus?

Thursday, May 26th, 2011

Last week, the State Department announced (here) that “BAE Systems plc of the United Kingdom (BAES), including its businesses, units, subsidiaries, and operating divisions and their assignees and successors, except BAE Systems, Inc. and its subsidiaries, entered into a civil settlement with the Department of State for alleged violations of the Arms Export Control Act (AECA) and the International Traffic in Arms Regulations (ITAR).” The release states that “under the four-year term of the Consent Agreement, BAES will pay in fines and in remedial compliance measures an aggregate civil penalty of $79 million, the largest civil penalty in Department history.”

The State Department action follows the March 1, 2010 guilty plea of BAE Systems plc. (see here for the prior post). BAE pleaded guilty to “conspiring to defraud the United States by impairing and impeding its lawful functions, to make false statements about its FCPA compliance program, and to violate the Arms Export Control Act and International Traffic in Arms Regulations.” In that DOJ enforcement action, BAE Systems plc agreed to pay a $400 million criminal fine.

I previously called (here) the BAE “bribery, yet no bribery” enforcement action one that contributes to the “facade of FCPA enforcement” (see here) and was asked several questions about the enforcement action by former Senator Arlen Specter (see here).

Like the DOJ enforcement action, the State Department action specifically notes that BAE Systems, Inc. was not involved in the conduct giving rise to the enforcement actions. BAE Systems Inc. is “the U.S.-based segment of BAE Systems plc” and “is responsible for relationships with the U.S. Government…”. (See here).

The State Department action involved BAE Systems plc entering into a consent decree (see here for the relevant documents) “to settle 2,591 violations of the AECA and ITAR in connection with the unauthorized brokering of U.S. defense articles and services, failure to register as a broker, failure to file annual broker reports, causing unauthorized brokering, failure to report the payment of fees or commissions, and failure to maintain records involving ITAR-controlled transactions.”

Certain of the improper conduct identified in the State Department documents relate to the lease and lease/sale of Gripen aircraft to the Ministries of Defence in the Czech Republic and Hungary – conduct also at issue in the DOJ’s prosecution of BAE (see here for the criminal information).

The State Department documents also relate to BAE’s use of advisers for defense transactions and proposed defense transactions involving U.S. defense articles and services without obtaining authorization from the State Department.

One of the advisors identified is Alfons Mensdorff-Pouilly. As noted in this previous post, the U.K. Serious Fraud Office (“SFO”) originally charged Alfons Mensdorff-Pouilly with “conspiracy to corrupt” and for “conspiring with others to give or agree to give corrupt payments [...] to unknown officials and other agents of certain Eastern and Central European governments, including the Czech Republic, Hungary and Austria as inducements to secure, or as rewards for having secured, contracts from those governments for the supply of goods to them, namely SAAB/Gripen fighter jets, by BAE Systems Plc.” Within days, the SFO dropped the charges. As noted in this previous post, the SFO explained that BAE would not agree to the SFO plea (watered down as it was) without the SFO agreeing to drop the charges against Count Mensdorff.

As to debarment, the State Department consent agreement states (at page 20) that the State “Department has determined to impose a statutory debarment of BAE Systems plc pursuant to section 127 of the ITAR [see here], based on the criminal charges [in the previous DOJ enforcement action].

Yet, the next sentence of the consent decree states as follows. “However, based on the foregoing and additional information provided by Respondent, and request for reinstatement by BAE Systems plc, the Assistant Secretary of State for Political-Military Affairs has determined under Section 38(g)(4) of the AECA [see here] that Respondent has taken appropriate steps to address the causes of the violations and to mitigate law enforcement concerns. Accordingly, BAE Systems plc shall be reinstated.”

The consent decree did however “place under a policy of denial” BAE Systems CS&S International, Red Diamond Trading Ltd. and Poseidon Trading Investments Ltd. Per the consent decree, this means that there will be “an initial presumption of denial during the case-by-case review of all licenses and other authorizations” involving these subsidiaries even though the consent decree states that “Transaction Exceptions” may be granted by the State Department. Furthermore, the consent decree states that all licenses, agreements, and other authorizations involving these subsidiaries previously issued “are not affected and are not revoked.”

The most recent annual report on BAE’s website states as follows regarding CS&S International. “The operating group’s CS&S International business predominantly acts as prime contractor for the UK government-to government defence agreement with Saudi Arabia and has a major in-country presence. Its main activities include operational capability support to both the Royal Saudi Air Force and Royal Saudi Naval Force and, more recently, the commencement of supply of 72 Typhoon aircraft.” Neither Red Diamond Trading Ltd. nor Poseidon Trading Investments Ltd. are mentioned in the 190 page annual report.

According to this U.K. Guardian article “BAE’s Secret Money Machine,” “in February 1998 Red Diamond Trading Ltd was anonymously incorporated in the British Virgin Islands and was used to channel payments all over the world, via Red Diamond accounts in London, Switzerland and New York.” As to Poseidon Trading, the same article states as follows. “BAE set up a second front company, purely to handle the Saudi commission payments for al-Yamamah. Poseidon Trading Investments Ltd was incorporated in the British Virgin Islands on June 25 1999.”

The DOJ’s criminal information contains various allegations regarding Saudi Arabia – without specifically mentioning the al-Yamamah contract. For more on the al-Yamamah contract see here -a PBS Frontline documentary titled Black Money.

The State Department’s recent $79 million enforcement action against BAE is in addition to the DOJ’s $400 million enforcement action against BAE from 2010. However, as Dru Stevenson (Professor of Law, South Texas College of Law) and Nick Wagoner (a law student at South Texas College of Law) explored in this recent post, in the 365 days that followed the 2010 DOJ enforcement action, BAE was awarded U.S. contracts in excess of $58 billion dollars.

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Speaking of debarment (or lack thereof) Senator Al Franken continues to lead on this issue. Earlier this month, during a Senate Judiciary Committee hearing, Franken questioned Attorney General Eric Holder why, over the past three years, hundreds of billions of dollars have been awarded to defense contractors who have previously been convicted of fraud. See here for the video. Senator Franken similarly questioned Assistant Attorney General Lanny Breuer during a January Senate Judiciary Committee hearing. See here for the video.

In connection with the Senate’s November 2010 hearing “Examining Enforcement of the Foreign Corrupt Practices Act” the DOJ was asked whether it favored “mandatory, conduct-based, debarment remedy for companies that engage in egregious bribery.” See here for the prior post including the DOJ’s response.

Uneven Justice: A Critical Look at FCPA Enforcement

Monday, May 23rd, 2011

The week starts with a guest post from Michael Volkov.

Volkov (here) is a partner at Mayer Brown LLP. His practice focuses on white collar defenses, FCPA enforcement and compliance, and litigation. The views expressed in this article are his own and do not represent those of his law firm, Mayer Brown LLP. He can be reached at mvolkov@mayerbrown.com.

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UNEVEN JUSTICE: A CRITICAL LOOK AT FCPA ENFORCEMENT

By Michael Volkov

The United States is a nation of laws: badly written and randomly enforced. ~Frank Zappa

Much has been written about the overall fairness of the Justice Department’s and the Securities and Exchange Commission’s aggressive FCPA enforcement program. Some have argued that DOJ and SEC have engaged in uneven justice: corporations plead to non-FCPA offenses, pay big fines, and continue business as usual. Others argue that DOJ has failed to prosecute individual executives and officers, or to ensure that corporations are debarred or suspended from continuing to sell to the federal government.

As a former federal prosecutor with nearly 20 years experience in the criminal justice system, I can assure you that some of the criticisms are accurate but some completely miss the mark. Last year, the Senate Judiciary Committee examined the controversy surrounding FCPA enforcement, and this year the House Judiciary Committee is planning to look at the issue.

DOJ is proud of its enforcement program. And rightly so – they have resuscitated a program which was dormant for years which now collects over one half of all criminal fines imposed each year in the United States. That is an impressive record.

Aside from the fundamental deficiencies inherent in DOJ’s voluntary disclosure process, DOJ claims that it gives adequate credit for corporate compliance programs, early cooperation and full disclosure. In response some suggest that plea agreements which are designed to protect companies from debarment and include pleas to non-FCPA charges are unfair. Part of that point is correct; the other part is flat out wrong.

Our criminal justice system operates day-to-day based on plea agreements. In the federal system, over 90 percent of federal cases are resolved through plea agreements. As part of that process, charge-bargaining is a critical component. DOJ’s decision to permit corporations, or typically country-specific subsidiaries to plead guilty to a non-FCPA offense, is in keeping with this long tradition. The underlying conduct as described in the plea agreement is known to all – the company engaged in systematic and widespread bribery. Nothing more, nothing less. To extrapolate from such a plea that DOJ is not enforcing the law is misguided and ignores the realities of the plea bargaining process.

On the other hand, DOJ’s willingness to forego debarment and/or suspension is certainly an issue that needs to be examined. As Professor Koehler testified at the Senate Judiciary Committee, BAE was awarded a government contract on the same day it plead guilty to a non-FCPA offense but paid a criminal fine over $400 million. That is certainly uneven justice, and Senators and policymakers should have taken note of this ironic enforcement twist.

Senator Specter and others have criticized the Justice Department for failing to include individual corporate executives and officers in its enforcement actions. The Justice Department’s Antitrust Division has a much better record on this score – corporations and individuals are prosecuted in criminal antitrust cases with equal vigor and results. Why has DOJ shied away from linking corporate cooperation to requiring cooperation against individual executives and officers at the offending company?

If the goal of DOJ’s enforcement program is corporate compliance, then the enforcement program needs to be recalibrated. Deterrence is an admirable objective and will certainly increase compliance, but DOJ has more tools available to it to encourage and promote cooperation. DOJ’s antitrust amnesty/leniency is an example of a program which has been incredibly successful on the enforcement and the compliance ends. While there are certainly problems with the application of a cartel-focused (multi-actor) model to FCPA cases, there are lessons which can be learned from the amnesty/leniency program.

We all aspire to equal justice and we all admire the image of justice that is blind as the hallmark of our judicial system. But right now what is needed is for justice to listen so that it operates with fairness and equal justice for all.

"FCPA Sanctions: Too Big To Debar?"

Wednesday, April 20th, 2011

Debarment (or lack thereof) is a periodic topic on this site.

Previously, I covered “Siemens … The Year After” (here), a post that highlighted in the year after resolution of the Siemens record-setting December 2008 FCPA matter, the U.S. government continued to do substantial business with the company it charged with engaging in a pattern of bribery “unprecedented in scale and geographic scope.”

In September 2010, I highlighted (here) the FBI’s $40 million contract with BAE – months after the FBI participated in resolution of the $400 million FCPA related enforcement action against the company.

In my November 2010 testimony (here) before the U.S. Senate, I stated as follows. “In order for the DOJ’s deterrence message to be completely heard and understood egregious instances of corporate bribery that legitimately satisfy the elements of an FCPA anti-bribery violation involving high-level executives and/or board participation should be followed with debarment proceedings against the offender.”

This testimony prompted then Senator Arlen Specter (who chaired the hearing) to ask me several follow-up questions for the record relating to debarment. (See here for the Q&A’s). Senator Christopher Coons (who also participated in the November 2010 hearing) also asked debarment follow-up questions of the DOJ.

As highlighted last week (here), the DOJ is opposed to a “mandatory, conduct-based, debarment remedy for companies that engage in egregious bribery.” As noted in the prior post, the DOJ’s responses seemed anchored in self-interest in that such a remedy would lessen its FCPA caseload, would make its job more difficult, and would take away it flexibility and leverage and resolving FCPA enforcement actions.

Enter Dru Stevenson (Professor of Law, South Texas College of Law – here and a past contributor to the site) and Nick Wagoner (a law student at South Texas College of Law).

Stevenson and Wagoner recently released a yet to be published article titled “FCPA Sanctions: Too Big to Debar?” (See here).

The authors (who can be reached at dstevenson@stcl.edu and nicholas.wagoner@gmail.com) provide this article summary.

“Despite the dramatic escalation in corporate fines and imprisonment imposed under the FCPA in recent years, a particularly lethal sanction for combating foreign corruption remains unused—suspension or debarment of prosecuted entities from future contracts with the U.S. Many of the firms caught bribing foreign officials have extensive contracts with a number of domestic federal agencies; meaning debarment may be a particularly devastating penalty both for the government contractor and the agency it transacts business with.

This begs the question: are certain private contractors too big to debar? As this Article demonstrates, it appears so. Certain federal agencies have become highly dependent on a handful of private firms responsible for satisfying the vast majority of government contracts. Because of the potential “collateral consequences” that may result from the collapse of a debarred contractor, these firms have enjoyed bailouts from agency officials who refuse to sanction corrupt practices through suspension or debarment. If ridding foreign markets of corruption truly is a top priority of the U.S., it seems both unfair and imprudent for federal agencies to continue awarding lucrative, multibillion-dollar contracts to firms recently prosecuted for fraudulently obtaining such contracts overseas.

This situation leads to the jaded viewpoint that paying fines when caught bribing foreign officials has “simply become a cost of doing business.” To help illuminate these concerns and lend support to the thesis, this Article examines the third largest FCPA-related enforcement actions to date: the BAE Systems case. On March 1, 2010, BAE Systems paid approximately $400 million in fines for its corrupt practices abroad. In the 365 days that followed however, BAE was awarded U.S. contracts in excess of $58 billion dollars. The U.S.’s refusal to debar BAE because of the risk of “collateral consequences” provides a case study of the benefits and drawbacks to deterring foreign corruption through suspension and debarment. This Article concludes that the U.S. must begin to diversify its portfolio of federal contractors so that prosecutors may leverage the legitimate threat of suspension and debarment to more effectively deter foreign corruption.”