Beverage Industry News

Disclosure by Central European Distribution Corp.

As noted in this Wall Street Journal Corruption Currents post, Central European Distribution Corp. (here - one of the world’s largest vodka producers) recently made an FCPA disclosure.  In this filing, the company (a Delaware company headquartered in New Jersey) stated as follows.

“It has [...] been determined that there has been a breach of the books and records provisions of the Foreign Corrupt Practices Act (FCPA) of the United States and potentially other breaches of the FCPA. It was determined that payments or gifts were made in a foreign jurisdiction in which the Company operates, and that there was a failure to maintain documentation in respect of certain of these payments or gifts adequate to establish whether there was a valid business purpose in making the payments or gifts. Furthermore, our management also identified a material weakness in our internal control over financial reporting regarding the implementation of our policy on compliance with applicable laws as of December 31, 2011. Our conclusion that this deficiency is a material weakness in our internal control over financial reporting is not based on misstatements in our historical consolidated financial statements or our consolidated financial statements as of and for the period ended December 31, 2011, but instead on the determination that we did not design or maintain sufficient policies, procedures, controls, communications or training to deter or prevent the risk of violations of law, including the Foreign Corrupt Practices Act (“FCPA”) of the United States.”

Beam Inc. Investigating Possible FCPA Violations

In other beverage industry news, the Times of India reports (here) that Beam Inc.  (here) “has initiated investigations into whistleblower allegations of financial misdemeanours at its India unit.”  According to the report, the investigation covers possible violations of Foreign Corrupt Practices Act.

As noted in this previous post, in July 2011 the SEC brought an FCPA enforcement action against beverage company Diageo PLC.

Alba-Alcoa Civil Case Settles

Earlier this week, Alcoa announced (here) that it “entered into a settlement agreement with Aluminium Bahrain B.S.C. (“Alba”) resolving a civil lawsuit that had been pending … since 2008.  Without admitting any liability, Alcoa agreed to make a cash payment to Alba of $85 million payable in two installments.”

Alba was represented by Akin Gump which put out this release.   The release notes that “the settlement arises out of a claim brought by Alba under the Racketeer Influenced and Corrupt Organizations (RICO) Act against Alcoa, an Alcoa subsidiary and Canadian businessman Victor Dahdaleh alleging a “pattern of corrupt activities by the defendants and officials in Bahrain in order to obtain long-term contract and pricing advantages in the sale of raw materials.”  As noted in the release,  ‘the case was stayed for nearly four years while the U.S. Department of Justice pursued a criminal investigation under the Foreign Corrupt Practices Act” and the settlement “represents the first time that a foreign-owned corporation has successfully sued a U.S. company in a federal court to recover losses suffered due to allegations of corrupt activity. “

As highlighted in this previous post, Alcoa’s agent (Dahdaleh) has been criminally charged in the U.K.

The DOJ and SEC’s investigation of Alcoa concerning the conduct at issue in the civil lawsuit is ongoing.

In its most recent quarterly filing, Alcoa stated as follows.

“The DOJ’s and the SEC’s investigations are ongoing. Alcoa has been in dialogue with both the DOJ and the SEC and is exploring whether a settlement can be reached. Given the uncertainty regarding whether a settlement can be reached and what the terms of any such settlement would be, Alcoa is unable to estimate a range of reasonably possible loss with regard to any such settlement, However, Alcoa expects the amount of any such settlement would be material in a particular period to Alcoa’s results of operations. If a settlement cannot be reached, Alcoa will proceed to trial with the DOJ and the SEC and under those circumstances is unable to predict an outcome or to estimate a range of reasonably possible loss. There can be no assurance that the final outcome of the government’s investigations would not have a material adverse effect on Alcoa.”

World Bank

The World Bank’s fraud and corruption unit, the Integrity Vice Presidency (INT), recently released its annual report (see here for the full report). This release states as follows.  The INT “concluded another strong year in its preventive and investigative efforts, with 83 debarments of wrongdoing firms, new agreements with national law enforcement authorities to expand the impact of INT’s investigations, numerous referrals to law enforcement agencies, and robust preventive efforts to help ensure Bank-financed projects deliver results.”

Survey Says

This past July, FTI Consulting conducted an on-line survey of 571 executives in UK businesses in board-level, senior management and middle management positions.  As noted in this release, among the survey findings were the following.

• 40% of UK businesses surveyed think the current economic climate is encouraging risk taking around compliance with the UK Bribery Act
• 27% do not believe the government will prosecute offenders
• 25% of board-level employees surveyed might breach Bribery Act regulations to win business
• 63% of respondents believe the UK Bribery Act eventually will have a positive effect on prospects for UK business

Spot-On

In the aftermath of the Wall Street Journal’s FCPA Inc.: Business of Bribery series (see here), the WSJ published the following letter to the editor from Steve Travis of Mercer Island, WA.

“The Foreign Corrupt Practices Act makes it illegal to offer money or a gift to foreign government officials or employees to gain a business advantage. Yet in the U.S., every business worthy of its name has lobbyists whose sole job in Washington, D.C., is to do exactly that: give money or gifts to our elected officials or employees of our government in a position to steer contracts their way. Does anyone really think that things like flying government officials around on company private jets or putting them up in private homes on vacations don’t come with a quid pro quo? Who is naive enough to think that contributions to election campaigns don’t come with strings attached?”

Spot-on – see here for a prior post (as well as numerous previous posts embedded therein).

*****

A good weekend to all.

Yesterday the U.K. Serious Fraud Office announced (here) an enforcement action against OPL regarding “unlawful conduct related to subsidiaries incorporated in Tanzania and Kenya.”  The conduct at issue included “participating in public tenders for contracts to supply governments with text books and other educational materials for the school curricula.”

Pursuant to a civil recovery order under the Proceeds of Crime Act, OPL agreed to pay £1,895,435.

Under the heading “self referral” the SFO release states as follows.

“In 2011, OUP became aware of the possibility of irregular tendering practices involving its education business in East Africa.  OUP acted immediately to investigate the matter, instructing independent lawyers and forensic accountants to undertake a detailed investigation. As a result of the investigation, in November 2011 OUP voluntarily reported certain concerns in relation to contracts arising from a number of tenders which its Kenyan and Tanzanian subsidiaries … entered into between the years 2007 and 2010. [...] The investigation was thorough – involving numerous interviews and an extensive review of documents and electronic data – and completed to the satisfaction of the SFO. The substantial product of those investigations was presented to the SFO [...]  The product of that work led the SFO … to believe that [OPL subsidiaries] had offered and made payments, directly and through agents, intended to induce the recipients to award competitive tenders and/or publishing contracts for schoolbooks.”

The SFO release states that “a number of relevant features … led to the decision to pursue a civil recovery order in place of a criminal prosecution.”  Those factors include the following:  “OUP has conducted itself in a manner which fully meets the criteria set out in the SFO guidance on self reporting matters of overseas corruption” and “there is no evidence of Board level (or the equivalent) knowledge or connivance within OUP in relation to the business practices which led to the case being referred to the SFO.”  The SFO release also states as follows.  “The products supplied were of a good standard and provided at ‘open market’ values.  This means that the jurisdictions involved have not been victims as a result of overpaying for the goods or as a result being supplied goods which were unsuitable or not required.”

The SFO release further states as follows.

“Since the occurrence of the conduct that is the subject matter of the civil recovery order, OUP has introduced enhanced compliance procedures intended to significantly reduce the risk of recurrence of such conduct within OUP.  These procedures will be subject to review by a monitor who will report to the Director of the SFO within twelve months …”.

As noted in the SEC release, OUP also “unilaterally offered to contribute £2,000,000 to not-for-profit organisations for teacher training and other educational purposes in sub-Saharan Africa.  This was a reflection of the seriousness with which OUP views the course of events that were subject to the investigation and a wish to acknowledge that the conduct of [its subsidiaries] fell short of that expected within its wider organisation.”  As to this contribution, the SFO releases states that it “decided that the offer should not be included in the terms of the court order as the SFO considers it is not its function to become involved in voluntary payments of this kind.”

In the release, SFO Director David Green states as follows.  “This settlement demonstrates that there are, in appropriate cases, clear and sensible solutions available to those who self report issues of this kind to the authorities.  The use of Civil Recovery powers has been exercised in accordance with the Attorney General’s guidelines.  The company will be adopting new business practices to prevent a recurrence of these issues and these new procedures will be subject to an extensive and detailed review.”

Finally, the SFO release notes that it ”has previously been subject to criticism in relation to the transparency of the processes and proceedings in civil recovery matters.”  Thus the SFO release links to a number of documents including this Claim Form which sets forth specific claim details.

Based on the same core conduct, the World Bank also announced yesterday (here) that “OUP has agreed to make a payment of US$500,000 to the World Bank.”  In addition, as part of a negotiated resolution, the World Bank “announced the debarment of two wholly-owned subsidiaries of OUP, namely: Oxford University Press East Africa Limited (OUPEA) and Oxford University Press Tanzania Limited (OUPT) – for a period of three years following OUP’s acknowledgment of misconduct by its two subsidiaries in relation to two Bank-financed education projects in East Africa.”

In a statement (here) OUP Chief Executive Nigel Portwood stated as follows.

“OUP is committed to maintaining the highest ethical standards, and we have been deeply concerned to discover evidence of wrongdoing in two of our African subsidiaries. We do not tolerate such behaviour. As soon as these matters came to light we acted immediately to investigate thoroughly and report to the relevant authorities. We have strengthened our management in the region and are taking appropriate disciplinary action in respect of those involved in this conduct.”

Distributor Due Diligence

David Simon and Alex Kramer (Foley & Lardner – here and here) recently authored “Here’s How U.S. Companies Can Practically Manage FCPA Risks That Come With Global Distribution Networks” in Bloomberg BNA, Prevention of Corporate Liability, Current Report.

The authors note as follows.  “While in some areas of the law selling a product to a distributor may insulate a company from liability, the same cannot be said for the FCPA. When a distributor purchases a product, title technically shifts, but if the distributor is seen as acting as a representative of the company whose goods it sells in foreign countries, and that distributor engages in bribery of foreign officials, FCPA liability may very well attach to the company. Consequently, companies need to be careful when working with distributors to ensure they do not engage in corrupt conduct that may wind up costing a company millions in fines and penalties and investigation and defense costs.”

The article next states as follows.  “Many companies employ vast distributor networks, sometimes including hundreds, if not thousands, of distributors around the world. Many distributors are more like customers than agents; they merely purchase a product and resell it to others, often in conjunction with other products purchased from other manufacturers. Is it really practical and necessary to conduct full FCPA due diligence on every one of those distributors? Do the U.S. companies in these situations even have the leverage to insist on FCPA representations and warranties in the written agreements, to demand audit rights, and to require certifications by and training of these distributors? The question thus arises whether U.S. companies are faced with a difficult choice either to accept substantial FCPA risk or to devote disproportionate resources to running an FCPA compliance program that fully vets all distributors. We think the answer to this question is ‘‘no’’ and that there is a practical way to minimize the FCPA risk associated with a global distributor network without devoting an unreasonable and disproportionate amount of resources to compliance.”

The practical way?

The authors suggest as follows.  “We recommend that companies following a risk-based approach take this risk analysis a step further and focus on the nature of their relationships with their distributors. The goal should be to determine which distributors are the most likely to qualify as agents, for whose acts the company can be held responsible. Think about this as a continuum of risk. On the low-risk end are distributors that are nothing more than resellers with little actual affiliation with the supplier company. On the high-risk end are distributors who are very closely tied to the supplier company, who effectively represent the company in the market and end up looking more like a quasisubsidiary than a customer. [...]  Once a company segregates the high-risk distributors that likely qualify as agents and potentially subject the company to FCPA liability from those that are mere resellers and pose little FCPA risk, FCPA compliance procedures can be tailored appropriately. For those distributors that qualify as ‘‘agents’’ and also pose FCPA risk, full FCPA due diligence, certifications, training, and contract language are imperative. For those that do not, more limited compliance measures that reflect the risk adjusted potential liability are perfectly appropriate.”

Say What?  (1)

A recent op-ed in the Minneapolis Star-Tribune (here) was titled “Good Companies Don’t Bribe. Period.”

Say what?

To be sure, certain Foreign Corrupt Practices Act enforcement actions are based on allegations that executive management or the board was involved in or condoned the improper conduct at issue.  For this type of FCPA enforcement action, the title of the article is indeed spot-on.   However, this type of FCPA enforcement action is not typical.  As noted in this prior post, there are several companies that I call the “World’s Most Ethical FCPA Violators.”  These are companies who have earned designation as one of the “World’s Most Ethical Companies” by Ethisphere yet still, during the same general time period, have resolved an FCPA enforcement action or are otherwise the subject of FCPA scrutiny.  Companies on this list include:  General Electric, Statoil, Deere & Company, Hewlett-Packard, Rockwell Automation, AstraZeneca, Novo Nordisk, and Sempra Energy.  For more, see this article from Corporate Crime Reporter titled “World’s Most Ethical Companies and the FCPA.”  See also this prior post discussing W.W. Grainger’s recent FCPA disclosure and noting that the company is consistently ranked as one of the “world’s most admired companies” by Forbes.

Say What? (2)

This recent post on the FCPA Blog states as follows.  “There’s a reason why you don’t see many of the biggest U.S.-based government contractors on the FCPA top ten list [...]. Not that they didn’t struggle with compliance during the early years of enforcement, but they moved quickly to update their compliance and ethics programs once they saw the tide of FCPA enforcement turning. Then they moved on.”

Say what?

Here is the list of the largest contractors in the government market based on an analysis of government procurement data during fiscal 2010.  Seven of the companies in the top twenty-one have, in the past few years, resolved FCPA (or related) enforcement actions or are otherwise the subject of FCPA scrutiny:  Raytheon, H-P, KBR, Dyncorp, ITT Corp., IBM, and BAE.

The “U.S.-based” and “FCPA top ten list” qualifiers were apparently chosen carefully in the FCPA Blog post.

World Bank News

Earlier this week, the World Bank announced (here) publication “for the first time a set of decisions issued by the World Bank Group’s Sanctions boards in cases of alleged fraud and corruption.”  World Bank Managing Director Sri Mulyani Indrawati stated as follows.  “The World Bank Group takes a hard line against corruption, and we believe that greater transparency must be part of that effort. By publishing Sanctions Board decisions, we are making all parties involved in the sanctions process more accountable. This move should deepen the deterrent effect of debarments and enhance the educational value of the Sanctions Board’s findings.”

The Sanctions Board decisions can be found here.

Antoine’s FCPA-Related Sentence Reduced

This recent post provided a Haiti Teleco roundup.  As noted in the prior post, the Haiti Teleco case (minus the manufactured and now former Africa Sting case) is the largest in FCPA history in terms of defendants charged – 13.  Among the group of defendants were three “foreign officials” charged with non-FCPA offenses including Robert Antoine, the former director of international affairs at Haiti Teleco who pleaded guilty in March 2010 to conspiracy to commit money laundering.  In June 2010, he was sentenced to 48 months in prison.

As Samuel Rubenfeld (Wall Street Journal Corruption Currents) noted in this recent post, Antoine, ”who testified twice at trial on behalf of prosecutors in foreign bribery cases had [his] four-year prison sentence reduced to 18 months, and he will soon be out of prison.”

*****

A good weekend to all.

Guidance

The conventional wisdom is that when the DOJ announced in November 2011 (see here for the prior post) that it would be issuing FCPA guidance in 2012, that this stalled introduction of an FCPA reform bill.  The current conversation thus seems to be focused on DOJ’s promised guidance.

This prior post highlighted how Senator Charles Grassley is curious about DOJ’s guidance and this prior post highlighted how Senators Amy Klobuchar and Chris Coons are as well.

Earlier this week, the Chamber of Commerce (and approximately 30 other trade associations or councils ranging from the American Gaming Association, the Financial Services Roundtable, the Poultry Federation, and the West Virginia Bankers Association) sent a letter (here) to Assistant Attorney General Lanny Breuer and SEC Director of Enforcement Robert Khuzami titled “Guidance Concerning the Foreign Corrupt Practices Act.”

The letter begins as follows.  “On behalf of the more than three million businesses and organizations whose interests we represent, we the undersigned organizations, write to request that this guidance address several issues and questions of significant concern to businesses seeking in good faith to comply with the FCPA. Detailed, authoritative guidance on these matters will enhance companies’ compliance with the FCPA by clarifying the “rules of the road” and by mitigating the significant interpretive challenges that companies face when applying the text of the statute to complex real-world circumstances.”

Topics addressed in the letter include:  “definitions of ‘foreign official’ and ‘instrumentality’”; “consideration of compliance programs in enforcement decisions”; “parent-subsidiary liability”; “successor liability”; “de minimis gifts and hospitality”; “mens rea standard for corporate criminal liability”; and “declination issues.”

In this previous post regarding the DOJ’s promised guidance I commented that while a welcome development, DOJ’s promise of FCPA guidance in 2012 will not cure many of the issues that are being debated in good faith during this new era of FCPA enforcement.  Furthermore, I expect DOJ’s guidance to be little more than a compilation in one document of information that is already in the public  domain for those who know where to look.  The Chamber letter similarly states as follows concerning compliance programs.  “If the forthcoming guidance on this issue consists merely of a recitation in summary form of specific corporate compliance programs that have been adopted pursuant to deferred prosecution agreements, non-prosecution agreements or SEC settlements, the marginal utility of such guidance to the cause of FCPA compliance in the business community will be limited.”

Whenever released and whatever it says, the DOJ’s guidance will be merely that – guidance.  What the FCPA needs is not guidance, but limited structural reforms  (such as a compliance defense) as well as a change in DOJ policy (such as  elimination of non-prosecution and deferred prosecution agreements).

A Re-Run Worth Watching

If you missed “The FCPA Compliance: Yes Or No” debate between Howard Sklar and I earlier this week on Securities Docket, here is the audio replay (approximately 70 minutes) along with the presentation slides.  At the end of the presentation participants were asked to vote “yes” or “no” and the vote tally was 68% “yes” 32% “no.”  Many thanks to Bruce Carton at Securities Docket for hosting.

Cinergy Telecommunications

In July 2011, Cinergy Telecommunications was added to the Haiti Teleco enforcement action (see here for the prior post).  In a superceding indictment, the privately-held telecommunications company incorporated in Florida was charged
with one count of conspiracy to violate the FCPA and to commit wire fraud, six counts of FCPA violations, one count of conspiracy to commit money laundering and 19 counts of money laundering.  In addition, Washington Vasconez Cruz (the president of Cinergy) was also charged as was Amadeus Richers (a former director of Cinergy).  As noted in this January post by Samuel Rubenfeld (Wall Street Journal Corruption Currents) in a second superceding indictment Cecilia Zurita (a former vice president of Cinergy as well as Cruz’s wife) was also added to the case.

Earlier this week, the DOJ moved to dismiss (see here) its case against Cinergy.  The motion states as follows.  “The government has recently learned that defendant Cinergy Telecommunications, Inc. is a non-operational entity that effectively exists only on paper for the benefit of two fugitive defendants, Washington Vasconez Cruz and Cecilia Zurita.  For several years, these defendants took actions making it appear as though Cinergy was an on-going operational company.”  The motion states that “defense counsel recently confirmed that Cinergy is in fact now non-operational, has no employees, and has no assets of any real value.”  The motion concludes as follows.  “In light of persuasive information the government has developed that Cinergy no longer exists in any real sense and that it was portrayed as existing at least in part to further fugitive defendants’ litigation strategy, the government in its discretion and under the circumstances presented has elected not to proceed with a trial against Cinergy.”

Joel Hirschhorn (here - Hirschhorn & Bieber P.A.) represents Cinergy as well as certain individual defendants in the case.

This Week’s FCPA Disclosure

In this prior post, I commented (somewhat tongue-in-cheek) that every week another company seems to be disclosing FCPA scrutiny.  So far so good.  This week’s disclosure is from Cobalt International Energy which disclosed as follows in its recent annual report.

“In connection with entering into our RSAs for Blocks 9 and 21 offshore Angola, two Angolan-based E&P companies were assigned as part of the contractor group by the Angolan government. We had not worked with either of these companies in the past, and, therefore, our familiarity with these companies was limited. In the fall of 2010, we were made aware of allegations of a connection between senior Angolan government officials and one of these companies, Nazaki Oil and Gáz, S.A. (“Nazaki”), which is a full paying member of the contractor group. Nazaki has repeatedly denied the allegations in writing. In March 2011, the SEC commenced an informal inquiry into these allegations. To avoid non-overlapping information requests, we voluntarily contacted the U.S. Department of Justice (“DOJ”) with respect to the SEC’s informal request and offered to respond to any requests the DOJ may have. Since such time, we have been complying with all requests from the SEC and DOJ with respect to their inquiry. In November 2011, a formal order of investigation was issued by the SEC related to our operations in Angola. We are fully cooperating with the SEC and DOJ investigations, have conducted an extensive investigation into these allegations and believe that our activities in Angola have complied with all laws, including the FCPA. We cannot provide any assurance regarding the duration, scope, developments in, results of or consequences of these investigations.”

World Bank Debarment

Earlier this week, the World Bank announced (here) “debarment of Alstom Hydro France and Alstom Network Schweiz AG (Switzerland) – in addition to their affiliates – for a period of three years following Alstom’s  acknowledgment of misconduct in relation to a Bank-financed hydropower  project.”  According to the release, “in 2002, Alstom made an improper payment of €110,000, to an entity controlled by a  former senior government official for consultancy services in relation to the  World Bank-financed Zambia Power Rehabilitation Project.”  The release further states as follows. ”The  debarment is part of a Negotiated Resolution Agreement between Alstom and the  World Bank which also includes a restitution payment by the two companies  totaling approximately $9.5 million. The debarment can be reduced to 21 months -  with enhanced oversight – if the companies comply with all conditions of the  agreement.”

What to make of the debarment based on conduct 10 years ago is a bit difficult.  This Wall Street Journal Story by Dionne Searcey and David Crawford states as follows.  “There was some confusion about the company’s official response. Early Wednesday, Alstom spokesman Patrick Bessy said Alstom didn’t admit guilt in its settlement with the World Bank. “The World Bank made assumptions which were not proved,” he said, adding that because the matter was so old, “Alstom was unable to find evidence it could present in its own defense so we decided to settle.”  Mr. Bessy said the blacklisting won’t affect Alstom Group, which has had only one project that involved World Bank funding since 2007. He said the company has several other subsidiaries engaged in hydroelectric projects that aren’t affected by the ban and will be eligible for World Bank funding of their projects. In all only about 5% of Alstom sales are in the hydroelectric field, Mr. Bessy said. In a later statement, the company rejected Mr. Bessy’s comments: “Alstom’s general counsel … stated that any comments that were previously made by Alstom are not valid.”

Reflecting On The New Era of FCPA Enforcement

As discussed in this previous post, in November 2010 Assistant Attorney General Lanny Breuer declared as follows.  “We are in a new era of FCPA enforcement’ and we are here to stay.”  Thomas Gorman (Dorsey Whitney) runs the always informative SEC Actions blog – see here.  In this post, titled “The New Era of FCPA Enforcement:  A Time For Reflection” Gorman hit the ball out of the park when he states as follows.

“Perhaps now is a good time to stop and reflect on what the courts and jurors have said about the “new era” of FCPA enforcement. Surely that era should be more than a dazzling array of ever increasing monetary payments by corporations or actions against individuals built on questionable blue collar tactics. Surely it should be more than business organizations spending ever increasing sums to conduct far reaching and perhaps at times unnecessary investigations at huge expense in a effort to win cooperation credit. Surely it should be more than brining increasing numbers of charges against individuals and demanding longer and longer prison terms. Perhaps now is the time to craft meaningful reform to the Act and enforcement policy to ensure clearer guidance and a more balanced application of the statutes to ensure that the laudable goals of the statute in a fair and balanced manner in the future. That would truly be a “new era” of FCPA enforcement.”

For additional reflections on this “new era” of FCPA enforcement, see this piece I published with the ABA Global Anti-Corruption Task Force.

*****

A good weekend to all.

The Siemens Argentina individual enforcement actions were brought after the DOJ faced scrutiny for not bringing any individual enforcement action in connection with a bribery scheme “unprecedented in scale and geographic reach” in which there existed at Siemens a “corporate culture in which bribery was tolerated and even rewarded at the highest levels of the company.”

Thus, the Siemens Argentina individual enforcement actions with allegations (and that is all they are at this point) of individual improper conduct are a welcome development and the DOJ ought to be recognized for bringing what will likely be a difficult case to prosecute.  Among other things, extradition issues loom, and many of the defendants are likely to aggressively mount a defense.

While a welcome development, two facts remain unchanged by last week’s development.

First, Siemens itself was never charged with FCPA anti-bribery violations for the same conduct its former employees and agents are now facing FCPA anti-bribery charges.  The reason is that FCPA anti-bribery charges would have hurt Siemens too much.  In its sentencing memorandum (here), the DOJ in explaining its charging decisions specifically stated as follows.  “The Department’s analysis of collateral consequences included the consideration of the risk of debarment and exclusion from government contracts.”  As noted last week in a Wall Street Journal article by Vanessa Fuhrmans “Shrugging Off Bribery Case, Siemens Gains Favor in the U.S.” (here),  “three years after Siemens AG reached a record foreign-bribery settlement with U.S. authorities, the German industrial conglomerate is capitalizing on business from an unexpected place—the U.S. government.”  Among things, the article notes that “Siemens today isn’t just benefitting from its ongoing business with the government. It’s made capturing more business and influence in Washington a central part of its U.S. strategy.” 

In short, the notion that certain companies selling certain products to certain customers are essentially immune from FCPA anti-bribery scrutiny remains a troubling issue, notwithstanding last week’s development. 

[Incidentally, under the FCPA's former so-called Eckhardt amendment, the lack of FCPA anti-bribery charges against Siemens would have precluded the FCPA anti-bribery charges the individuals now face.  See U.S. v. McLean, 738 F.2d 655 (5th Cir. 1984)  ("[B]oth the language of the Act and its legislative history reveal a clear intent to impose criminal sanctions against the employee who acts at the behest of and for the benefit of his employer only where his employer has been convicted of similar FCPA violations. [...] We hold that in order to convict an employee under the FCPA for acts committed for the benefit of his employer, the government must first convict the employer.”]

Second, even with last week’s development, the fact remains that the DOJ and SEC have addressed - through individual enforcement actions - only a sliver of the conduct at issue in the 2008 enforcement action.  As alleged by the enforcement agencies, the corruption at Siemens involved more than $1.4 billion in bribes to government officials in Asia, Africa, Europe and the Americas.  As alleged (see here) “among the transactions on which Siemens paid bribes were those 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; mobile telephone networks in Bangladesh; telecommunications projects in Nigeria; national identity cards in Argentina; medical devices in Vietnam, China, and Russia; traffic control systems in Russia; refineries in Mexico; and mobile communications networks in Vietnam.” 

Some individual or individuals presumably paid or authorized these numerous non-Argentina bribes.   If last week’s development is the only individual enforcement actions resulting from the 2008 Siemens enforcement action, continued scrutiny and asking of the why questions is warranted.

What other egregious corporate FCPA enforcement action might yield future individual enforcement actions?  Based on the DOJ’s allegations, Daimler would seem like a good bet.  See here for the prior post.

Representative Peter Welch (D-VT) once again demonstrated that he has very little understanding of how the Foreign Corrupt Practices Act is actually enforced, or if he does, that he is more interested in creating the illusion that he is addressing an issue.  See here for the press release.

As reported by Samuel Rubenfeld on the Wall Street Journal Corruption Currents page (see here), yesterday Welch introduced the “Overseas Contractor Reform Act.”   The bill (here) is a revised version of the impotent legislation Welch previously introduced in May 2010 – see this prior post, a bill that unanimously passed the House in September 2010 – see this prior post.

The bill Welch introduced yesterday, along with Representative Jason Chaffetz (R-Utah), states that “it is the policy of the United States Government that no Government contracts or grants should be awarded to individuals or companies who violate the FCPA after the date of the enactment of this Act.”

This is a sound policy statement.  As I discussed in my November 2010 Senate testimony (here) a debarment penalty for egregious instances of corporate bribery that legitimately satisfy the elements of an FCPA anti-bribery violation involving high-level executives and/or board participation represents sound public policy.

However, the problem with the bill, as with the previous bill, is its trigger for debarment - “any person found to be in violation of the [FCPA - defined to include only the FCPA's antibribery provisions] shall be proposed for debarment from any contract or grant awarded by the Federal Government within 30 days after the judgment finding such person to be in violation becomes final.”

As silly as it may sound, in this “new era” of FCPA enforcement or this “facade era” of FCPA enforcement if you prefer (see here) few companies are actually ever “found to be in violation of the FCPA.”

The reason is because of how the DOJ is allowed to enforce the FCPA and it is two-fold.  First, most corporate FCPA enforcement actions are resolved through a non-prosecution agreement (NPA) or deferred prosecution agreement (DPA).  These resolution vehicles do not result in findings of FCPA violations or judgments of FCPA violations.  Second, debarment under the bill is triggered only for violations of the FCPA’s anti-bribery provisions.  In the most egregious cases of corporate bribery the DOJ rarely charges FCPA anti-bribery offenses, but rather FCPA books and records or internal controls violations or other non-FCPA offenses (see Siemens, Daimler, BAE, etc.).  Why?  For the stated reason (see here) of avoiding debarment considerations – both in the U.S. and elsewhere.

Thus, Welch’s new bill again represents impotent legislation despite the fact that there was extensive commentary and analysis of the previous bill’s shortcomings for the above reasons.

While substantively similar to the prior bill, the bill introduced yesterday is different in the following ways:  the new bill contains a less restrictive definition of “person,” the new bill defines FCPA to include all three prongs of the statute (78dd-1, 78dd-2, and 78dd-3) and, most important, the new bill has an “exemption for self-reported violations” which specifically states “upon a determination by the head of a Federal agency that a person has reported a violation of the [FCPA] voluntarily to the Federal Government, the head of the agency may exempt the person from the applicability of this Act.”

As noted in this prior post, the DOJ is opposed to “mandatory, conduct-based, debarment remedy for companies that engage in egregious bribery.”

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.

*****

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.

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.

*****

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.

For instance, last week Eli Lilly disclosed (here) that it is “in advanced discussions with the SEC to resolve their investigation” that began in August 2003 as to “compliance by Polish subsidiaries of certain pharmaceutical companies, including Lilly, with the [FCPA].”

AstraZeneca disclosed (here) last week as follows. “As previously disclosed, AstraZeneca has received inquiries from the US Department of Justice and the Securities and Exchange Commission in connection with an investigation into Foreign Corrupt Practices Act issues in the pharmaceutical industry across several countries. AstraZeneca is cooperating with these inquiries and is investigating, among other things, sales practices, internal controls, certain distributors, and interactions with healthcare providers, institutions, and other government officials. AstraZeneca is investigating inappropriate conduct in certain countries, including China.”

Johnson & Johnson, previously included in the group of companies under investigation, resolved an FCPA enforcement action last month (see here for the prior post).

Many have suggested that J&J’s voluntarily disclosed conduct served as the point of entry for the industry wide sweep based on this sentence from the J&J deferred prosecution agreement – “J&J has cooperated and agreed to continue to cooperate with the Department in the Department’s investigations of other companies and individuals in connection with business practices overseas in various markets.”

Thus, the J&J enforcement action in many ways provides a glimpse into potential future FCPA enforcement actions involving the pharmaceutical / medical device industry.

Two issues likely to be found in such future FCPA enforcement actions are discussed below.

42 USC 1320a-7(a)

The J&J deferred prosecution agreement states – for why the DOJ agreed to resolve the case the way it did – as follows. “Were the Department to initiate a prosecution of J&J or one of its operating companies and obtain a conviction, instead of entering into this Agreement to defer prosecution, J&J could be subject to exclusion from participating in federal health care programs pursuant to 42 U.S.C. 1320a-7(a).” (See here for those provisions).

This component of the J&J enforcement is nothing new – as many companies such as Siemens, BAE and others – have escaped the most serious consequences of the alleged criminal conduct because of “who” the companies were (i.e. the products sold and to whom).

This feature of FCPA enforcement is controversial (for additional reading – see here for my Q&A exchange with former Senator Arlen Specter and here for the recent article titled “FCPA Sanctions: To Big to Debar”).

In recent months, the DOJ has pledged allegiance to the OECD Convention on Bribery to defend certain of its sentencing and “foreign official” enforcement positions (see here for instance).

Does the OECD Convention say anything about enforcement agencies looking at the unique aspects of an alleged violator and then crafting a resolution to fit that alleged violator?

Yes it does.

Article 5 of the OECD Convention (here), under the heading “Enforcement,” states that investigation and prosecution of bribery offenses “shall not be influenced by considerations of national economic interest, the potential effect upon relations with another State or the identity of the natural or legal persons involved.”

Health-Care Providers as “Foreign Officials”

As noted in the prior J&J post (here) the principal FCPA enforcement theory at issue in the pharmaceutical / medical device industry sweep would seem to be the notion that [insert country] had a national healthcare system wherein most [insert country] hospitals are publicly owned and operated and thus health care providers who work at publicly-owned hospitals are government employees providing health care services in their official capacities. According to the DOJ, the individuals are therefore “foreign officials” “as that term is defined in the FCPA.”

Against this backdrop, it is interesting to observe that in the United States approximately 20% of hospitals are owned by state or local governments (see here). In addition, approximately 150 more medical centers are run by the Veterans Health Administration (see here).

Are we calling 20+% of U.S. health-care providers U.S. officials? If not, why not and why the difference?

Something to keep in mind as additional pharmaceutical / medical device FCPA enforcement actions burst onto the scene.

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.”